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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the fiscal year ended December 31, 1996
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the transition period from ___________________ to ____________________
Commission file number 000-21430
RIVIERA HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 88-0296885
- ------------------------ -------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
2901 Las Vegas Boulevard South 89109
Vegas, Nevada ----------
- ------------------------------- (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (702) 734-5110
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Registration S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or amendment to this Form 10-K. [X]
Based on the average price bid for the Registrant's Common Stock as
of March 4, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $46,920,000.
As of March 4, 1997, the number of outstanding shares of the
Registrant's Common Stock was 4,923,380.
Documents incorporated by reference: The Company's Proxy Statement dated April
16, 1997, relating to the Annual Meeting of Stockholders to be held on May 8,
1997, is incorporated by reference in Part III hereof.
================================================================================
Page 1 of 39 Pages
Exhibit Index Appears on Page 34 hereof.
RIVIERA HOLDINGS CORPORATION AND SUBSIDIARY
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Item 1. Business...........................................................3
General .......................................................... 3
Business and Growth Strategy...................................... 4
The Riviera....................................................... 6
Marketing Strategy................................................ 9
Las Vegas Market..................................................10
The Black Hawk Project............................................11
Colorado Market...................................................12
Riviera Gaming Management.........................................13
Competition.......................................................13
Employees and Labor Relations.....................................15
Regulation and Licensing..........................................15
Federal Registration..............................................24
Item 2. Properties........................................................24
Item 3. Legal Proceedings.................................................24
Item 4. Submission of Matters to a Vote of
Security Holders................................................24
Item 5. Market for the Registrant's Common Stock and
Related Security Holder Matters.................................25
Item 6. Selected Financial Data...........................................26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................27
Results of Operations.............................................27
1996 Compared to 1995.............................................27
1995 Compared to 1994.............................................29
Liquidity and Capital Resources...................................30
Forward Looking Statements........................................31
Recently Adopted Accounting Standards.............................32
Item 8. Financial Statements and Supplementary Data, etc..................32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................32
Item 10. Directors and Executive Officers of the Registrant................33
Item 11. Executive Compensation....................................... ....33
Item 12. Principal Shareholders............................................33
Item 13. Certain Relationships and Related Transactions ...................33
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8K..............................................34
2
PART I
Item 1. Business
General
Riviera Holdings Corporation, a Nevada corporation (the "Company"),
through its wholly owned subsidiary, Riviera Operating Corporation, a Nevada
corporation ("ROC"), owns and operates the Riviera Hotel & Casino (the
"Riviera") located on the Strip in Las Vegas, Nevada. The Riviera caters to
adults seeking traditional Las Vegas-style gaming and entertainment. The Riviera
is situated on a 26-acre site across the Strip from Circus Circus and adjacent
to the Las Vegas Hilton and the Las Vegas Convention Center. The property
features approximately 2,100 hotel rooms (including 169 suites), 105,000 square
feet of casino space, a 100,000 square-foot convention, meeting and banquet
facility (one of the largest in Las Vegas), four full-service restaurants, a
430-seat buffet, four showrooms, a 200-seat entertainment lounge, 47 food and
retail concessions and approximately 2,900 parking spaces. The casino contains
approximately 1,300 slot machines, 50 gaming tables, a keno lounge and a
200-seat race and sports book. The Riviera also offers one of the most extensive
entertainment programs in Las Vegas, including such popular shows as Splash, An
Evening at La Cage, Crazy Girls and Bottoms Up and featured comedians at the
Riviera Comedy Club.
Opened in 1955, the Riviera was one of the original casino/hotels on
the Las Vegas Strip catering to high stakes gamblers. Since opening, the Riviera
has been expanded several times. The most recent expansion, which occurred
during 1988 through 1990, resulted in significant cost overruns and ultimately
contributed to the Company's predecessor filing for bankruptcy protection in
1991. In 1992 the current management team was assembled and successfully guided
the Company through its emergence from bankruptcy in June 1993. As a result of
the bankruptcy, all of the Common Stock and $100.0 million of the Company's 11%
Mortgage Notes due December 31, 2002 (the "First Mortgage Notes") under the
First Mortgage Note Indenture (the "Note Indenture") were distributed to the
secured creditors of the predecessor company.
The new management team implemented new marketing programs, which
included targeting California and the southwestern United States, and initiated
a number of strategic changes to reposition the Riviera, including a shift from
"high-rollers" to mid-level gaming customers, particularly slot players, who
seek a broader entertainment experience. Management reconfigured the casino
space to improve the flow of customer traffic, installed new slot machines and
bill acceptors, reduced the number of gaming tables and de-emphasized baccarat.
Management also decreased the volatility of gaming revenues by reducing credit
limits, outsourcing the Company's sports book and shifting to parimutuel horse
wagering. Improved hotel marketing efforts have resulted in one of the highest
room occupancy rates on the Strip.
On October 22, 1996, the Company filed a registration statement on
Form S-1, registration no. 333-14593 (the "Registration Statement"), for a
public offering of its Common Stock (the "Offering"). The Company expects to
file an Amendment No. 1 to the Registration Statement ("Amendment No. 1") on
March 10, 1997. The Offering, as amended by Amendment No. 1, contemplates an
underwritten offering by the Company of 1,750,000 shares of its Common Stock to
the public and the sale of 1,250,000 shares of Common Stock to the public by
certain selling stockholders in a secondary underwritten offering. The Company
also granted the underwriters an option to purchase an additional 450,000 shares
of Common Stock to cover over-allotments. Based on the last reported sales price
of $14.125 on the American Stock Exchange on March 4, 1997, and subject to
market conditions, the Company would receive (excluding the underwriters'
over-allotment option) net proceeds from the Offering of approximately $24.1
million (after deducting expenses of the Offering estimated at approximately
$0.6 million).
3
Business and Growth Strategy
Over the past several years, management initiated a number of
strategic changes at the Riviera to reposition the property to compete in the
Las Vegas gaming market. The Company has formulated a business and growth
strategy to maintain the competitive position of the Riviera as well as grow the
Company. The key elements of the Company's business and growth strategy are
discussed below.
Develop New Casino/Hotels
The Company intends to pursue a growth strategy by developing or
acquiring casino/hotel properties in Nevada and other jurisdictions. As part of
this strategy, on March 4, 1997, the Company entered into a letter of intent
with Eagle to form RBL as a joint venture to develop the Black Hawk Project at
what management believes is the premier gaming site in the Black Hawk/Central
City, Colorado gaming market. The 71,000 square foot site, zoned entirely for
gaming, is the first gaming site encountered when traveling from Denver and is
approximately an hour drive from and 40 miles west of Denver. Approximately
three million people live within a 100-mile radius of Black Hawk/Central City
and casinos in the market generated gaming revenues of approximately $291
million in 1995 and $309 million in 1996.
In addition to the Black Hawk Project, the Company also plans to
review and selectively acquire or develop casino/hotel properties both in Nevada
and other jurisdictions. These other jurisdictions may include Michigan and
Mexico. Other than the Black Hawk Project, the Company does not presently have
any agreements in principle for involvement in any new or financially troubled
projects.
Manage Distressed Casino/Hotel Properties
In order to capitalize on management's experience in repositioning
and managing the Riviera through the bankruptcy process, the Company formed
Riviera Gaming Management, Inc. ("RGM") for the primary purpose of obtaining
casino management contracts with financially distressed casino/hotels in Nevada
and other jurisdictions. Since August 1996, RGM has been managing the Four
Queens Hotel/Casino ("Four Queens") located adjacent to the Golden Nugget on
Fremont Street in downtown Las Vegas. Under the Four Queens management contract,
RGM receives a guaranteed minimum management fee plus additional compensation,
based on earnings before interest, taxes, depreciation and amortization
("EBITDA") improvement of the Four Queens, and warrants to purchase 20% (on a
fully diluted basis) of the equity of the Four Queens' parent.
The Company believes that there is increasing demand for the services
of skilled gaming and hospitality professionals. The Company intends to pursue
management contracts with other financially distressed gaming properties.
Management is actively reviewing and evaluating other financially troubled
gaming properties in Nevada and other jurisdictions with a view towards managing
properties with underlying sound business potential and in which the Company can
purchase an equity interest.
Continue to Improve Performance of the Riviera
The Riviera will continue to emphasize marketing programs that appeal
to slot and mid-level table game customers with a focus on creating repeat
customers and increasing walk-in traffic. Key elements of this strategy include
offering a value-oriented experience by providing a variety of hotel rooms,
restaurants and entertainment, with some of Las Vegas' most popular shows, all
at reasonable prices. The Company is continuing an extensive capital investment
program at the Riviera, including completion of the upgrade of its slot machines
in the second quarter of 1997 and the refurbishment of all its hotel rooms,
which is expected to be completed in the fall of 1997. In addition, the Company
will
4
focus its marketing to take advantage of the Riviera's location by capitalizing
on the anticipated increase in walk-in traffic from the addition of 1,000 rooms
across the Strip at Circus Circus and the expansions of the Las Vegas Hilton and
the Las Vegas Convention Center.
Emphasize Slot Play. Management instituted a number of initiatives at
the Riviera to increase slot play, including the replacement of old slot
machines, the installation of bill acceptors and the addition of slot hosts. The
Company's strategy is to continue to increase slot play through marketing
programs and other improvements, including (i) completion of the Company's slot
upgrade program in the second quarter of 1997, (ii) addition of new signage,
(iii) promotion of the Riviera Player's Club, (iv) sponsorship of slot
tournaments, (v) creation of promotional programs and (vi) marketing of the
"World's Loosest Corner of Slots" and "$40 for $20" slot promotions.
Create Repeat Customers. Generating customer loyalty is a critical
component of management's business strategy as retaining customers is less
expensive than attracting new ones. The Company generates repeat customers by
(i) providing a high level of service to its customers to ensure an enjoyable
experience while at the Riviera, (ii) responding to customer surveys and (iii)
focusing marketing efforts and promotional programs on customers with positive
gaming profiles.
Provide Extensive Entertainment Options. The Company believes
entertainment provides an attractive marketing tool to attract customers to the
Riviera. The Riviera offers one of the most extensive entertainment programs in
Las Vegas, including such well received shows as Splash (a variety show), An
Evening at La Cage (a female impersonation show), Crazy Girls (an adult revue)
and Bottoms Up (a burlesque-style show) as well as featured comedians at the
Riviera Comedy Club. The Company continually updates its shows in response to
customer surveys and to keep them fresh. Tickets for the shows are offered at
reasonable prices in keeping with the Company's emphasis on mid-level customers.
Attract Walk-In Traffic. The Company seeks to maximize the number of
people who patronize the Riviera that are not guests in the hotel. The Riviera
is well situated on the Las Vegas Strip near Circus Circus, The Stardust Hotel &
Casino, the Westward Ho Casino & Hotel, the Las Vegas Hilton and the Las Vegas
Convention Center. Management strives to attract customers from those
facilities, as well as capitalize on the growth in Las Vegas visitors in
general, with the goal of increasing walk-in traffic by (i) providing a variety
of quality, value-priced entertainment and dining options, (ii) promoting the
"World's Loosest Corner of Slots" and "$40 for $20" slot promotions, and placing
them near the entrances to the casino, (iii) upgrading the exterior of the
Riviera including painting, lighting and landscaping and (iv) completing Phase I
(see "-- Further Develop the Riviera") to attract customers into the casino.
Focus on Convention Customers. The Riviera targets convention
business because it typically provides patrons willing to pay higher room rates
and it provides certain advance planning benefits, since conventions are usually
booked two years in advance of the event date. The Riviera has 100,000 square
feet of exhibit, meeting and banquet space (one of the largest convention
facilities provided by a casino/hotel in Las Vegas) making it attractive to
large groups. Management focuses its marketing efforts on conventions whose
participants have the most active gaming profile and higher room rate, banquet
and function spending habits. The Riviera also benefits from its proximity to
the Las Vegas Convention Center which makes it attractive to city-wide
conventioneers looking to avoid the congestion that occurs during a major
convention, particularly at the south end of the Strip.
5
Further Develop the Riviera
The Company has engaged architects and designers to prepare an
overall expansion plan (the "Master Plan") for the existing 26-acre site. The
Company believes that implementation of the Master Plan will attract additional
customers.
Phase I. The initial phase of the Master Plan will include a 40,000
square foot expansion of the 100,000 square foot convention, meeting and banquet
facility at an estimated cost of approximately $6 million. The Company derives
approximately 25% of its hotel occupancy from convention customers and considers
them a critical component of its customer base. Management believes that an
expansion of the convention space is necessary to accommodate the growth in the
size and number of the groups that presently use the facility as well as new
groups. Phase I will also include the redevelopment of the approximately 20,000
square feet of vacant space fronting the Las Vegas Strip, across from Circus
Circus, to attract walk-in traffic as well as tourists throughout the city.
Future Phases. Future Phases may include development of an
approximately 60,000 square foot domed shopping and entertainment complex to be
constructed directly over the casino and containing stores and entertainment
that will appeal to the Riviera's main target audience, adults aged 45 to 70.
The exit from the complex will be by an escalator which will deliver patrons to
the casino. The Company expects to find partners to finance, develop and operate
the entertainment attraction and retail stores. The Company also has
approximately nine acres available for additional development. The Company is
exploring a number of options in order to make the best use of this valuable
land.
As part of the Master Plan, the Company is considering a joint
venture for the development of a time-share condominium tower. The Company
expects to contribute land to the joint venture and a third party would
construct and sell time-share units and arrange financing. Management believes
that additional rooms adjacent to the Las Vegas Convention Center would be
particularly attractive to business customers and would provide a base of
additional casino customers. Other potential development projects include the
construction of a new hotel tower and additional parking facilities. The
development of a time-share tower, hotel tower or parking facility would require
additional financing, a release of restrictions under the Note Indenture and, in
the case of the time-share tower, a joint venture partner, none of which the
Company has in place at this time.
The Riviera
The Riviera is located on the corner of Las Vegas Boulevard, the
"Strip," and Riviera Drive, across the Strip from Circus Circus. The back of the
26-acre property fronts Paradise Road across from the Las Vegas Hilton and the
Las Vegas Convention Center. The Riviera is strategically located to take
advantage of the high tourist traffic along the Strip as well as the increasing
number of convention customers that use the Las Vegas Convention Center.
Gaming. The Riviera has 105,000 square feet of casino space. The
casino currently has approximately 1,300 slot machines and 50 gaming tables,
including blackjack, craps, roulette, pai gow poker, Caribbean Stud(R) poker,
baccarat, Let It Ride(R) and poker. The casino also includes a keno lounge and a
200-seat race and sports book.
Gaming operations at the Riviera are continually monitored and
modified to respond to both changing market conditions and customer demand in an
effort to attract new customers, retain existing customers, and encourage repeat
customer business. New and innovative slot and table games have been introduced
based on customer feedback. Management devotes substantial time and attention to
the type, location and player activity of all its slot machines. The Company is
continuing an extensive capital
6
investment program for the upgrade of its slot machines which is expected to be
completed in the second quarter of 1997.
The current management team has made an effort to redirect its
business away from high-stakes wagerers and to focus, instead, on mid-level
gaming customers and thus has implemented stricter credit policies and a
reduction of baccarat table limits. As a result, the percentage of table game
dollar volume represented by credit play declined from approximately 24% in 1993
to 15% in 1996. Because the extension of credit is not as necessary for success
with mid-level gaming customers, management expects that providing credit, and
the risks associated with possible losses on uncollectible and discounted
receivables, will continue to be less significant to the casino. However,
because management intends to maintain a balanced marketing strategy which will
include some level of credit being extended, providing credit and the risks
associated therewith will remain. Receivables from casino operations declined
from approximately $2.9 million at December 31, 1993 to approximately $2.3
million at December 31, 1996 and the allowance for bad debts and discounts from
casino operations declined from approximately $763,000 to $432,000 during the
same period. These reductions resulted primarily from the imposition of stricter
credit standards. Management maintains strict controls over the issuance of
credit and aggressively pursues collection of its customer receivables.
Hotel. The Riviera's hotel is comprised of five hotel towers with
approximately 2,100 rooms, including 169 suites. Built in 1955 as part of the
original casino/hotel, the nine-story North Tower features 391 rooms and 11
suites. In 1967, the 12-story South Tower was built with 147 rooms and 31
suites. Another 220 rooms and 72 suites including penthouse suites were added to
the property through the construction of the 17-story Monte Carlo Tower in 1974.
In 1977, the six-story San Remo Tower added 243 rooms and six suites to the
south side of the resort. The most recent phase of hotel expansion was completed
in 1988 upon the opening of the 930 room, 49 suite, 24-story Monaco Tower. The
Company is currently refurbishing all of its rooms, with approximately 1,100
completed through the end of 1996 and the balance expected to be completed in
the fall of 1997. Management believes that the Riviera has attained room
occupancy rates that are among the highest on the Strip with 97.5% for 1994,
97.0% for 1995, and 98.2% for 1996 (based on available rooms).
Restaurants. The quality, value and variety of food services are
critical to attracting Las Vegas visitors. The Riviera offers four bars and five
restaurants and serves an average of approximately 5,000 meals per day,
including banquets and room service. The following table outlines, for each
restaurant, the type of service provided and total seating capacity:
Seating
Name Type Capacity
- ---- ---- --------
Kady's Coffee Shop 290
Kristofer's Steak and Seafood 162
Rik' Shaw Chinese 124
Ristorante Italian Italian 126
World's Fare Buffet All-you-can-eat 432
-----
Total......................................... 1,134
=====
In addition, the Riviera has a food court operated by a third party
under a long-term lease with 200 seats and several fast-food restaurants,
including Burger King(R), Panda Express(R), Pizza Hut(R) and "TCBY"(R).
7
Convention Center. The Riviera features 100,000 square feet of
convention, meeting and banquet space. The convention center is one of the
largest in Las Vegas and is an important feature that attracts customers. The
facility can be reconfigured for multiple meetings of small groups or large
gatherings of up to 5,000 people. The Riviera hosts approximately 150
conventions per year. As of December 31, 1996, the Riviera had over 440,000
confirmed convention-related room nights for 1997 and 1998. On average,
approximately 25% of the rooms are occupied for conventions. See "Business and
Growth Strategy -- Further Develop the Riviera" for a description of potential
expansion of the convention center.
Entertainment and Other. The Riviera has one of the most extensive
entertainment programs in Las Vegas, offering five different regularly scheduled
shows and special appearances by headline entertainers in concert. The five
in-house productions are regularly updated and changed. In November 1994, the
award winning Splash production was closed in order to revise the show and
remodel the showroom for the new Splash, which opened on June 23, 1995. A
summary of the shows and times is outlined below:
Seating
Show Type Performance Times Capacity
- ---- ---- ----------------- --------
Splash Variety show Twice a night, seven nights per 950
week
An Evening at La Female impersonation Twice a night, five nights per 575
Cage week; three times on
Wednesday
Crazy Girls Adult-oriented production Twice a night, five nights per 410
week; three times per night on
Saturday
Bottoms Up Afternoon burlesque show Twice a day, five days per 410
week
The Riviera Stand-up comedy Twice a night, five nights per 350
Comedy Club week; three times a night on
Friday & Saturday
Other entertainment includes the 200-seat Le Bistro entertainment
lounge located in the casino which offers live performances six times per night.
In addition, the Riviera sponsors special events, such as the Las Vegas Bowl
football game, and presents major concerts such as the Beach Boys, the Pointer
Sisters, Drew Carey and the Doobie Brothers.
The Riviera's pool area is approximately 75,000 square feet and is
centrally located between the property's hotel towers. The pool area features an
olympic-size swimming pool. The Riviera also has tennis courts and a fitness
center and spa.
The Riviera has 41 retail concessions located throughout the property
which include gift shops, a jewelry store, men and women's apparel stores, a
children's shop and a shoe store.
8
Marketing Strategy
In contrast to many of the new casino/hotels that cater to families,
the Company believes its customers prefer a traditional Las Vegas-style
entertainment and gaming environment. As a result, the Company focuses its
marketing efforts on adults. The operating profits of the Riviera depend upon
the level of gaming activity in the casino as well as revenues from lodging,
food and beverage, conventions, entertainment and retail operations.
Accordingly, the marketing strategy of the Riviera is to (i) target customers
age 45 to 70 who have more discretionary income and higher spending profiles,
(ii) achieve maximum occupancy and room rates and (iii) obtain the most
profitable mix of business. In developing its overall marketing programs, the
Company conducts extensive, ongoing research of its target customers'
preferences through written surveys, one-on-one interviews and focus groups.
The Company focuses on attracting its guests through a range of
entertainment opportunities. The Riviera has one of the most extensive
entertainment programs in Las Vegas with five different regularly scheduled
shows and special appearances by headline entertainers. In addition, the Riviera
offers a variety of quality dining options, a range of accommodations from
deluxe rooms to penthouse suites, numerous recreational facilities and 41 retail
outlets located throughout the property. The Company believes that it offers a
value-oriented experience by providing a variety of hotel rooms, restaurants and
entertainment, with some of Las Vegas' most popular shows, all at reasonable
prices.
The Company designs promotional offers targeted at certain mid-level
gaming patrons that are expected to provide revenues based upon their historical
gaming patterns. The Company contacts these customers through a combination of
direct mail and telemarketing by an in-house marketing staff and independent
representatives located in major cities. The Riviera uses a proprietary database
which is linked to its player tracking system to help identify customers'
requirements and preferences; this allows the Riviera to customize promotions to
attract repeat visitors. The Company offers customers personalized service,
credit availability and access to a variety of complimentary or reduced rate
room, dinner and entertainment reservations. Management uses a specialized
multi-tiered marketing approach to attract customers in each of its major market
segments. In addition, the Company hosts an array of special events, including
slot and table tournaments, designed to attract customers for an extended stay.
The Company focuses its marketing efforts in the southwestern United
States during the spring and summer months and in the midwestern United States
during the fall and winter months because of the vacation patterns of the
Riviera's target customers in those markets. Marketing efforts in California are
consistent throughout the year reflecting the constant flow of California
residents to Las Vegas.
One of the Company's most successful permanent promotions is its "$40
for $20" slot promotion which attracts slot players to the casino. The promotion
offers $40 of slot play on certain promotional machines for $20 cash. If the
customer does not win a jackpot of at least $40, a prize with a retail value of
at least $20 is awarded. The sign-up counter and the promotion machines are
located near an entrance to the casino and often draw long lines of patrons. The
Company has introduced this promotion at the Four Queens and has been approached
to license this promotion to other casinos as well, which it may do in the
future.
Another successful promotion is the "World's Loosest Corner of Slots"
which is an area of the casino that contains banks of slot machines with the
guaranteed highest payback percentages of any similar machines in Las Vegas.
Like the "$40 for $20" slot promotion, the "World's Loosest Corner of Slots" is
located near an entrance to the casino to attract walk-in traffic.
The Company targets the following segments of the Las Vegas market:
9
Mid-Level Gaming Customers. The Company has developed a marketing
program intended to develop a loyal following of repeat slot and mid-level table
game customers. Management believes it has been able to successfully attract
these patrons using the Riviera's restaurants, hotel accommodations and
entertainment and by focusing on customer service. Management has adopted a
selective approach to the extension of credit to these customers in order to
reduce volatility of operating results. The Company uses its research data to
tailor promotional offers to the specific tastes of targeted customers. All slot
and table players are encouraged to join the Riviera Player's Club and to fill
out surveys that provide the Riviera with personal information and preferences
and tracks their level of play. Members of the Riviera Player's Club earn bonus
points based upon their level of play, redeemable for free gifts, complimentary
services or cash rebates. Promotional offers are made to qualifying customers
through direct mail and telemarketing.
Tour and Travel. The tour and travel segment of the market consists
of customers from across the country who utilize "packages" to reduce the cost
of travel, lodging and entertainment. These packages are produced by wholesale
operators and travel agents and emphasize mid-week stays. Tour and travel
patrons often book at off-peak periods enabling the Company to maintain
occupancy rates at the highest levels throughout the year. Management has
developed specialized marketing programs and cultivated relationships with
wholesale operators, travel agents and major domestic air carriers to expand
this market. The Company's three largest tour and travel operators, including
America West Vacations, currently account for approximately 500 room bookings
per night. The Company makes an effort to convert tour and travel customers who
meet the Company's target customer profile into repeat customers.
Conventions. This market segment consists of two groups: (i) those
trade organizations and groups that hold their events in the banquet and meeting
space provided by a single hotel, and (ii) those attending city-wide events,
usually held at the Las Vegas Convention Center. The Riviera targets convention
business because it typically provides patrons willing to pay higher room rates
and provides certain advance planning benefits, since conventions are usually
booked two years in advance of the event date. The Riviera has 100,000 square
feet of exhibit, meeting and banquet space (one of the largest convention
facilities provided by a casino/hotel in Las Vegas) making it attractive to
large groups. Management focuses its marketing efforts on conventions whose
participants have the most active gaming profile and higher room rate, banquet
and function spending habits. The Riviera also benefits from its proximity to
the Las Vegas Convention Center which makes it attractive to city-wide
conventioneers looking to avoid the congestion that occurs during a major
convention, particularly at the south end of the Strip.
Free and Independent Travelers. This market segment consists of
persons who travel to Las Vegas from all areas of the world, many of whom
originate from the western United States. These customers are not affiliated
with groups and make their reservations directly with the hotel or through
independent travel agents. The Riviera benefits from high name recognition with
this market segment.
Las Vegas Market
The Riviera targets the large and expanding Las Vegas tourist and
gaming market. Las Vegas is the largest city in Nevada, with a local population
in excess of one million, and is Nevada's principal tourist center. Gaming and
tourism are the major attractions, complemented by warm weather and the
availability of many year-round recreational activities. Although Las Vegas'
principal markets are the western region of the United States, most
significantly Southern California and Arizona, Las Vegas also serves as a
destination resort for visitors from all of North America. In addition, a
significant percentage of visitors originate from Latin America and Pacific Rim
countries such as Japan, Taiwan, Hong Kong and Singapore.
10
Las Vegas is one of the largest and fastest growing entertainment
markets in the country. According to the Las Vegas Convention and Visitors
Authority (the "LVCVA"), the number of visitors traveling to Las Vegas has
increased at a steady and significant rate for the last ten years from 15.2
million in 1986 to more than 29.0 million in 1995, a compound annual growth rate
of 7.5%. Gaming has continued to be a strong and growing business with Las Vegas
Strip gaming revenues increasing at a compound annual growth rate of 9.9% from
$1.6 billion in 1986 to $3.6 billion in 1995.
Historically, Las Vegas has had one of the strongest hotel markets in
the country. The number of hotel and motel rooms in Las Vegas has increased by
over 40% from approximately 67,000 at the end of 1989 to 95,000 at the end of
1996, giving Las Vegas the most hotel and motel rooms of any metropolitan area
in the country. Despite this significant increase in the supply of rooms, the
Las Vegas hotel occupancy rate exceeded 91% for each of 1993, 1994, 1995 and the
first 11 months of 1996. Since January 1, 1996, approximately 4,700 new hotel
rooms opened and as of December 31, 1996, there were over 9,200 hotel rooms
under construction (which combined constitutes a 14.7% increase in the number of
hotel and motel rooms in Las Vegas) and the LVCVA estimated that approximately
60,000 additional hotel rooms were proposed for construction.
The Company believes that the growth in the Las Vegas market has been
enhanced as a result of a dedicated program by the LVCVA and major Las Vegas
casino/hotels to promote Las Vegas as a major convention site, the increased
capacity of McCarran Airport and the introduction of large themed destination
resorts in Las Vegas. In 1986, approximately 1.5 million people attended
conventions in Las Vegas and generated approximately $1.0 billion of non-gaming
economic impact. For the first 11 months of 1996, the number of convention
delegates had increased to 3.2 million with approximately $3.9 billion of
non-gaming economic impact. According to the LVCVA, Las Vegas was the largest
convention market in the country in 1995.
During the past five years, McCarran Airport has expanded its
facilities to accommodate the increased number of airlines and passengers which
it services. The number of passengers traveling through McCarran Airport has
increased from approximately 12.4 million in 1986 to 30.5 million in 1996, a
compound annual growth rate of 9.4%. Construction is currently underway on
numerous roadway enhancements to improve access to the airport. The airport has
additional long-term expansion plans underway which will provide additional
runways, three new satellite concourses, 60 additional gates and other
facilities.
The Black Hawk Project
The Company recently signed a letter of intent with Eagle to form
RBL, a joint venture, to develop a casino at what management believes is the
premier development site (the "Development Site") in Black Hawk, Colorado. The
Development Site is currently the closest gaming site to Denver and is the first
site encountered when traveling from Denver to Black Hawk/Central City. The
Black Hawk/Central City market primarily serves the metropolitan Denver area and
is approximately an hour drive and 40 miles from central Denver.
Located on South Main Street, the Development Site is directly in
front of the Colorado Central Station, owned by Anchor Gaming, which management
believes is the most successful casino in Colorado due to its location, size and
availability of parking. Unlike most other sites, the Development Site is level
and has a relatively broad footprint, which provides significant cost and time
savings in construction relative to other projects in the market and can
accommodate a large Las Vegas-style casino on one floor.
11
The Development Site comprises 71,000 square feet, zoned for gaming.
The casino building is expected to be approximately 62,000 square feet and
include approximately 1,000 slot machines and 14 table games. In addition, the
facility will provide entertainment, food and beverage service and will
incorporate an attached covered parking facility for 500 vehicles. The Company
believes that the Black Hawk Project could be expanded beyond its currently
permitted scope based on zoning waivers granted to other casino developers.
The Company currently estimates that total costs for completion of
the Black Hawk Project will be approximately $55 million. The Company estimates
that, in addition to the equity financing of RBL, approximately $33 million of
third party mortgage and equipment financing will be required in order to
complete the Black Hawk Project. The Company currently does not have any
commitments for such financing. It is anticipated that construction on the
Development Site will begin in the third quarter of 1997, with an opening of the
casino/hotel scheduled for mid-1998.
The Black Hawk Project joint venture outlined in the March 4, 1997
letter of intent (the "Letter of Intent") between the Company and Eagle
contemplates the development of an integrated gaming, entertainment and parking
facility on the Development Site. As part of the proposed joint venture and
development of the Black Hawk Project, the Company will purchase an
approximately 80% interest in RBL for $17.6 million and Eagle will acquire an
approximately 20% interest in RBL for $4.4 million, assuming an approximately
$55 million project cost and 40% equity capitalization. The Company intends to
use the net proceeds of the Offering to fund its investment in RBL. Eagle has an
option to increase its ownership interest in RBL up to 49.9% at any time prior
to the date on which RBL is licensed by the Colorado gaming authorities by
acquiring such additional ownership interest from the Company at cost. In
addition, the Company has committed to provide a completion guaranty for up to
$5.0 million. The Company will also enter into a management agreement with RBL
that will provide for management fees based on gross revenue and EBITDA of the
casino.
The Black Hawk Project is subject to a number of conditions. These
conditions include obtaining commitments for approximately $33 million of
mortgage and equipment financing on satisfactory terms, obtaining bonded
fixed-price construction and completion contracts, obtaining regulatory
approvals for the Black Hawk Project and completing a development and operating
agreement with Eagle. There can be no assurance that these and other conditions
to the Black Hawk Project can be satisfied on terms satisfactory to the Company.
In addition, the Black Hawk Project site may be subject to an adverse
mineral rights claim which, if validated through the appeal of the adverse
claimant, could materially and adversely affect development of the Black Hawk
Project. Further, certain environmental conditions exist at the Black Hawk
Project site, the remediation or related costs of which could increase
development costs of the Black Hawk Project significantly.
Colorado Market
In November 1990, the state of Colorado approved limited stakes
gaming ($5.00 or less per wager) in two historic gold mining areas, Black
Hawk/Central City and Cripple Creek. Because of the $5.00 maximum bet, the
casinos in Colorado emphasize gaming machine play. Black Hawk and Central City
are contiguous and are located approximately 40 miles from Denver and 10 miles
from Interstate 70, the main highway connecting Denver to many of Colorado's
major ski resorts. Cripple Creek is located approximately 45 miles from Colorado
Springs and 75 miles from Pueblo. Casinos located in the Black Hawk/Central City
area serve primarily the residents of Denver and Boulder, Colorado and
surrounding communities. Approximately three million people live within a
100-mile radius of the Black Hawk/Central City area.
12
The following table sets forth statistical information relating to
the growth of the Black Hawk/Central City market compiled from data published by
the Colorado Department of Revenue:
Years Ended December 31,
-----------------------------------------------------------
1993 1994 1995 1996
----------- ------------ --------- ------------
Aggregate Gaming Revenues (in millions) $186.2 $243.4 $291.0 $308.8
Revenue Per Slot Machine Per Day $69.55 $79.88 $84.94 $93.04
Average Number of Slot Machines 6,922 7,705 8,636 8,446
Average Number of Casinos in Operation 36 34 32 33
Riviera Gaming Management
In order to capitalize on management's experience in repositioning
and managing the Riviera through the bankruptcy process, the Company formed RGM,
a wholly owned subsidiary of the Company, for the primary purpose of obtaining
casino management contracts with financially distressed casino/hotels in Nevada
and other jurisdictions. Management believes there will be an increasing demand
for their services by financially distressed casino/hotels. In addition, RGM may
provide other services including assisting new venue licensee applicants in
designing and planning their gaming operations and managing the start-up of new
gaming operations. These services would include casino design, equipment
selection, employee recruitment and training, control and accounting systems and
marketing programs.
Four Queens Management Agreement. Since August 1996, RGM has been
operating the Four Queens located adjacent to the Golden Nugget on Fremont
Street in downtown Las Vegas under an interim management agreement for a fee of
$83,333 per month. A long-term management agreement (the "Management Agreement")
with Elsinore Corporation ("Elsinore"), the owner of the Four Queens, went into
effect on February 28, 1997, the effective date of the Chapter 11 plan of
reorganization of Elsinore.
The term of the Management Agreement is approximately 40 months,
subject to earlier termination or extension. Either party may terminate if
cumulative EBITDA for the first two fiscal years is less than $12.8 million. The
term can be extended by an additional 24 months at RGM's option, if cumulative
EBITDA for the three fiscal years of the term is at least $19.2 million. RGM
will be paid a fee of 25% of any increase in annual EBITDA over $4.0 million,
subject to a $1.0 million minimum fee, payable in equal monthly installments.
RGM has received warrants for 20% of Elsinore's fully diluted equity,
exercisable during the term or extended term of the Management Agreement at an
exercise price based on the higher of (i) the per share book value on the
effective date of the Elsinore bankruptcy plan or (ii) total shareholders'
equity of $5.0 million. Either party can terminate the Management Agreement if
(i) substantially all the Four Queens' assets are sold, (ii) the Four Queens is
merged or (iii) a majority of the Four Queens' or Elsinore's shares are sold.
Upon such termination, RGM will receive a $2.0 million termination bonus minus
any amount realized or realizable upon exercise of the warrants.
Competition
Intense competition exists in the gaming industry, and many of the
Company's competitors have significantly greater resources than the Company. The
Riviera faces competition from all other casinos and hotels in the Las Vegas
area, principally competitors located on or near the Las Vegas Strip. In recent
months, several of the Company's direct competitors have opened new
casino/hotels or have
13
commenced or completed major expansion projects, and other casino/hotels and
expansions are planned. In addition, a number of new mega-resorts on the Strip
have been announced and are expected to be completed within the next two years.
Expansions or enhancements of existing properties or the construction of new
properties by competitors could have a material adverse effect on the Company's
business.
Management believes that the most direct competition for the Riviera
comes from certain large casino/hotels located on or near the Strip which offer
amenities and marketing programs similar to those offered by the Riviera. These
facilities currently include Bally's Las Vegas, the Flamingo Hilton Hotel, The
Frontier Hotel and Gambling Hall, Harrah's Las Vegas, The Monte Carlo Resort &
Casino, the Sahara Resort & Casino, The Stardust Hotel & Casino and the
Tropicana Resort & Casino. The Riviera competes on the basis of the atmosphere
and excitement offered by the facility, the desirability of its location, the
quality and relative value of its hotel rooms and restaurants, the quality and
variety of entertainment offered, customer service, the availability of
convention facilities, its marketing strategy and special marketing and
promotional programs.
Intense competition also characterizes the Black Hawk/Central City,
Colorado market. Casinos generally compete on the basis of parking, location and
size. There are many casinos currently operating in the Black Hawk/Central City
market, including Colorado Central Station, Harveys Wagon Wheel Hotel/Casino,
Gilpin Hotel Casino, Fitzgeralds Casino Black Hawk, Bullwhackers Black Hawk and
Bullwhackers Central City. In addition, several new development projects and
expansion plans have been announced, including construction of a casino by a
joint venture between Jacobs Entertainment, Ltd. and the owner/operator of
Gilpin Hotel Casino. A number of Colorado casinos have ceased operations and
others have filed for protection under Chapter 11 of the United States
Bankruptcy Code. Others have closed temporarily or reduced the number of their
employees. The Company believes that many Colorado casinos may not be operating
profitably. In Black Hawk, Anchor Gaming has announced that the construction of
a new casino across from its existing property has been halted, and the joint
development of a casino by Nevada Gold & Casinos Inc. and an affiliate of
Caesars World Gaming Development Corporation is also currently inactive.
The Company's Black Hawk Project may compete for customers with
casinos located on Indian reservations in southwestern Colorado. In addition,
the legalization of casino gaming in or near any metropolitan area, such as
Denver, Colorado, from which RBL is expected to draw customers, would have a
material adverse effect on RBL's business. Colorado law requires local voter
approval for any expansion of limited gaming into additional locations. State
and local public initiatives regarding limited gaming in Colorado are being
actively pursued by many persons. Several cities within Colorado have active
citizens' lobbies that were able to place gaming initiatives on recent statewide
ballots. Although these initiatives failed by substantial margins, new
initiatives could be introduced on future statewide ballots to allow expansion
of gaming in Colorado. Future initiatives, if passed, could significantly
increase the competition for gaming customers, thereby adversely affecting RBL's
business in Colorado.
The Company also competes with casinos in other states, riverboat and
Native American gaming ventures, state-sponsored lotteries, on- and off-track
wagering, card parlors and other forms of legalized gaming in the United States,
as well as with gaming on cruise ships and international gaming operations. In
addition, certain states have recently legalized or are considering legalizing
casino gaming in specific geographical areas within those states. Any future
development of casinos, lotteries or other forms of gaming in other states,
particularly areas close to Nevada, such as California, could adversely affect
the Company's operations.
14
Employees and Labor Relations
As of December 31, 1996, the Riviera employed approximately 2,100
persons and had collective bargaining contracts with seven unions covering
approximately 1,300 of such employees including food and beverage employees,
rooms department employees, carpenters, engineers, stage hands, musicians,
electricians, painters and teamsters. The Company's agreements with the Southern
Nevada Culinary and Bartenders Unions, Musicians Union and Stage Hands Union,
which cover the majority of the Company's unionized employees, were renegotiated
in 1994 and will expire May 31, 1997. The Teamsters, Operating Engineers,
Carpenters, Painters and Electricians Unions' collective bargaining agreements
were renewed in 1995 and generally expire in 1998. Although unions have been
active in Las Vegas, management considers its employee relations to be
satisfactory. There can be no assurance, however, that new agreements will be
reached without union action or will be on terms satisfactory to the Company.
Regulation and Licensing
Nevada
Nevada Gaming Authority. The ownership and operation of casino gaming
facilities in Nevada are subject to: (i) The Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively the "Nevada Act"); and (ii)
various local ordinances and regulations. The Company's gaming operations are
subject to the licensing and regulatory control of the Nevada Gaming Commission
(the "Nevada Commission"), the Nevada State Gaming Control Board (the "Nevada
Board"), and the Clark County Liquor and Gaming Licensing Board (the "Clark
County Board"). The Nevada Commission, the Nevada Board and the Clark County
Board are collectively referred to as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time and in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. Change in such laws, regulations and
procedures could have an adverse effect on the Company's gaming operations.
ROC is required to be licensed by the Nevada Gaming Authorities. The
gaming license held by ROC requires the periodic payment of fees and taxes and
is not transferable. ROC is also licensed as a manufacturer and distributor of
gaming devices. Such licenses also require the periodic payment of fees and are
not transferable. The Company is registered by the Nevada Commission as a
publicly traded corporation (a "Registered Corporation") and has been found
suitable to own the stock of ROC which is a corporate gaming licensee under the
terms of the Nevada Act. As a Registered Corporation, the Company is required
periodically to submit detailed financial and operating reports to the Nevada
Commission and to furnish any other information which the Nevada Commission may
require. No person may become a shareholder of, or receive any percentage of
profits from, ROC without first obtaining licenses and approvals from the Nevada
Gaming Authorities. The Company and ROC have obtained from the Nevada Gaming
Authorities the various registrations, approvals, permits and licenses required
in order to engage in gaming activities and manufacturing and distribution
activities in Nevada.
15
All gaming devices that are manufactured, sold or distributed for use
or play in Nevada, or for distribution outside of Nevada, must be manufactured
by licensed manufacturers, distributed or sold by licensed distributors and
approved by the Nevada Commission. The approval process includes rigorous
testing by the Nevada Board, a field trial and a determination as to whether the
gaming device meets strict technical standards that are set forth in the
regulations of the Nevada Gaming Authorities. Associated equipment must be
administratively approved by the Chairman of the Nevada Board before it is
distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has
a material relationship to, or material involvement with, the Company or ROC in
order to determine whether such individual is suitable or should be licensed as
a business associate of a gaming licensee. Officers, directors and certain key
employees of ROC must file applications with the Nevada Gaming Authorities and
may be required to be licensed or found suitable by the Nevada Gaming
Authorities. Officers, directors and key employees of the Company who are
actively and directly involved in the gaming activities of ROC may be required
to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Any change in a
corporate position by a licensed person must be reported to the Nevada Gaming
Authorities and, in addition to their authority to deny an application for a
finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or ROC, the companies involved would have to sever
all relationships with such person. In addition, the Nevada Commission may
require the Company or ROC to terminate the employment of any person who refuses
to file appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
The Company and ROC are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by ROC must be
reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by ROC, the
gaming licenses it holds could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, the Company, ROC and the persons involved could be subject to
substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Further, a supervisor could be appointed by
the Nevada Commission to operate the casino and, under certain circumstances,
earnings generated during the supervisor's appointment (except for reasonable
rental value of the casino) could be forfeited to the State of Nevada.
Limitation, conditioning or suspension of the gaming licenses of ROC or the
appointment of a supervisor could (and revocation of any gaming license would)
materially adversely affect the Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless
of the number of shares owned, may be required to file an application, be
investigated, and have his suitability as a beneficial holder of the Company's
voting securities determined if the Nevada Commission has reason to believe that
such ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
16
The Nevada Act requires any person who acquires more than 5% of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman of
the Nevada Board mails the written notice requiring such filing. Under certain
circumstances, an "institutional investor," as defined in the Nevada Act, which
acquires more than 10%, but not more than 15%, of a Registered Corporation's
voting securities may apply to the Nevada Commission for a waiver of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the corporate charter, bylaws,
management, policies or operations of the Registered Corporation, or any of its
gaming affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding the Registered Corporation's voting securities for
investment purposes only. Activities which are deemed to be consistent with
holding voting securities for investment purposes only include: (i) voting on
all matters voted on by shareholders; (ii) making financial and other inquiries
of management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability
or a license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any shareholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary action if,
after it receives notice that a person is unsuitable to be a shareholder or to
have any other relationship with the Company or ROC, the Company (i) pays that
person any dividend or interest upon voting securities of the Company, (ii)
allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) pays remuneration in any
form to that person for services rendered or otherwise, or (iv) fails to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities including, if necessary, the immediate purchase of said voting
securities for cash at fair market value. Additionally, the Clark County Board
has the authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming licensee.
The Nevada Commission may, in its discretion, require the holder of
any debt security of a Registered Corporation, to file applications, be
investigated and be found suitable to own the debt security of a Registered
Corporation, if it has reason to believe that such ownership would be
inconsistent with the declared policies of the State of Nevada. If the Nevada
Commission determines that a person is unsuitable to own such security, then
pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
17
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for finding
the record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Nevada Commission has not imposed such a requirement on the Company.
The Company may not make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. The Company has received approval of the Offering by the Nevada
Commission. Approval of a public offering does not constitute a finding,
recommendation or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment merits of the
securities offered. Any representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation,
stock or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling shareholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming Licensees, and Registered Corporations
that are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established regulations
to ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming Licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's shareholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the
type of gaming or activity involved, are payable to the State of Nevada and to
the County in which the ROC's operations are conducted. Depending upon the
particular fee or tax involved, these fees and taxes are payable either monthly,
quarterly or annually and are based upon either: (i) a percentage of the gross
revenues received; (ii) the number of gaming devices operated; or (iii) the
number of table games operated. A casino entertainment tax is also paid by
casino operations where entertainment is furnished in connection with the
selling of food, refreshments or merchandise. Nevada Licensees that hold a
license to manufacture and distribute slot machines and gaming devices, such as
ROC, also pay certain fees and taxes to the State of Nevada.
18
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such persons
(collectively, "Licensees"), and who proposes to become involved in a gaming
venture outside of Nevada, is required to deposit with the Nevada Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada Board of their participation in such
foreign gaming. The revolving fund is subject to increase or decrease in the
discretion of the Nevada Commission. Thereafter, Licensees are required to
comply with certain reporting requirements imposed by the Nevada Act. Licensees
are also subject to disciplinary action by the Nevada Commission if they
knowingly violate any laws of the foreign jurisdiction pertaining to the foreign
gaming operation, fail to conduct the foreign gaming operation in accordance
with the standards of honesty and integrity required of Nevada gaming
operations, engage in activities that are harmful to the State of Nevada or its
ability to collect gaming taxes and fees, or employ a person in the foreign
operation who has been denied a license or finding of suitability in Nevada on
the ground of personal unsuitability.
Other Regulation. The sale of alcoholic beverages at the Riviera is
subject to licensing, control and regulation by the Clark County Board. All
licenses are revocable and are not transferable. The Clark County Board has full
power to limit, condition, suspend or revoke any such license, and any such
disciplinary action could (and revocation would) have a material adverse affect
upon the operations of ROC.
Colorado
Colorado Gaming Regulation. On November 6, 1990, the State of
Colorado electorate approved an amendment to the Colorado Constitution (the
"Colorado Amendment") that legalized limited gaming. As a result, limited gaming
became lawful in the cities of Central City, Black Hawk and Cripple Creek on
October 1, 1991. The Colorado Amendment defines limited gaming as the use of
slot machines and the card games of blackjack and poker, with a maximum single
bet of five dollars.
Limited gaming is confined to the commercial districts of these
cities as those commercial districts were defined in city ordinances by Central
City on October 7, 1981, by Black Hawk on May 4, 1978, and by Cripple Creek on
December 3, 1973. In addition, the Colorado Amendment restricts the conduct of
limited gaming to structures that conform to the architectural styles and
designs that were common to the areas prior to World War I, as determined by the
municipal governing bodies. Further, the Colorado Amendment provides that no
more than 35% of the square footage of any building and no more than 50% of any
one floor of such building may be used for limited gaming. Pursuant to the
Colorado Amendment, limited gaming operations are prohibited between the hours
of 2:00 a.m. and 8:00 a.m. The Colorado Amendment allows limited gaming to occur
in establishments licensed to sell alcoholic beverages under the Colorado Liquor
Code.
The Colorado Amendment further provides that, in addition to any
other applicable license fees, up to a maximum of 40% of the adjusted gross
proceeds of limited gaming operations may be payable by a licensee for the
privilege of conducting limited gaming.
The Colorado legislature promulgated the Limited Gaming Act of 1991
(the "Colorado Act") to implement the provisions of the Colorado Amendment. The
Colorado Act was signed into law on June 4, 1991 and has been amended
subsequently.
Through the Colorado Act, the Colorado legislature declared that its
public policy toward limited gaming would be that: (i) the success of limited
gaming is dependent upon public confidence and trust that licensed limited
gaming is conducted honestly and competitively; that the rights of the creditors
of licensees are protected; and that gaming is free from criminal and corruptive
elements; (ii) public
19
confidence and trust can be maintained only by strict regulation of all persons,
locations, practices, associations and activities related to the operation of
licensed gaming establishments and the manufacture or distribution of gaming
devices and equipment; (iii) all establishments where limited gaming is
conducted and where gambling devices are operated and all manufacturers, sellers
and distributors of certain gambling devices and equipment must therefore be
licensed, controlled and assisted to protect the public health, safety, good
order and the general welfare of the inhabitants of the state to foster the
stability and success of limited gaming and to preserve the economy and policies
of free competition in the state of Colorado; and (iv) no applicant for a
license or other affirmative commission approval has any right to a license or
to the granting of the approval sought. Any license issued or other commission
approval granted pursuant to the provisions of the Colorado Act is a revocable
privilege, and no holder acquires any vested right therein or thereunder.
Pursuant to the Colorado Act, the ownership and operation of limited
gaming facilities in Colorado are subject to extensive regulation. Among other
prohibitions, the Colorado Act prohibits persons under the age of 21 from
participating in limited gaming or lingering in gaming areas of a casino. No
limited gaming may be conducted in Colorado unless all appropriate licenses are
approved by and obtained from the Colorado Limited Gaming Control Commission
(the "Colorado Commission"). Further, the Colorado Commission has full and
exclusive authority to promulgate, and has promulgated, rules and regulations
related to limited gaming (the "Colorado Regulations"). Such authority does not
require any approval by or delegation of authority from the Colorado Department
of Revenue (the "Colorado Revenue Department"). In addition, the Colorado Act
created the Division of Gaming within the Colorado Revenue Department to
license, implement, regulate and supervise the conduct of limited gaming. The
Director of the Division (the "Division Director"), under the general
supervision of the Colorado Commission, has broad powers to ensure compliance
with the Colorado Act and the regulations promulgated by the Colorado
Commission.
The Colorado Commission may issue the following five types of
licenses: (i) slot machine manufacturer or distributor; (ii) operator; (iii)
retail gaming; (iv) support; and key employee. The first three licenses are
issued for a one-year period and require annual renewal. However, support
licenses and key employee licenses are issued for two year periods and are
renewable. The Colorado Commission has broad discretion to condition, suspend,
revoke, limit or restrict a license at any time and also has the authority to
impose fines.
An applicant for any type of Colorado license must provide the
following information: (i) personal background information; (ii) financial
information; (iii) participation in legal or illegal activities in Colorado or
other jurisdictions, including foreign countries; (iv) criminal record
information; (v) information concerning all pecuniary and equity interests in
the applicant; and (vi) other information as required. Prior to licensure,
applicants must satisfy the Colorado Commission that they are suitable for
licensing and are of good moral character. The Colorado legislature has defined
unsuitability or unsuitable in relation to a person as the inability to be
licensed by the Colorado Commission because of prior acts, associations or
financial conditions, and, in relation to acts or practices, those which violate
or would violate the statutes or rules or are or would be contrary to the
declared legislative purposes of the Colorado Act. Applicants have the burden of
proving their qualifications to the Colorado Commission and must submit to and
pay the full cost of any background investigations as may be ordered by the
Colorado Commission. There is no limit on the cost of such background
investigations and no guaranty that any applicant will receive licensing from
the Colorado Commission.
All natural persons employed in the field of limited gaming must hold
either a support or key employee license. Every retail gaming licensee must
have a key employee licensee in charge of all limited gaming activities
available at all times when limited gaming is being conducted. The Colorado
20
Commission may determine that any employee of a licensee is a key employee and,
therefore, require that such person apply for licensing as a key employee.
A retail gaming license is required for all persons permitting or
conducting limited gaming on their premises and such license may be granted only
to a retailer. In addition, an operator license is required for all persons who
permit slot machines on their premises or who engage in the business of placing
and operating slot machines on the premises of a retailer. No person may have an
ownership interest in more than three retail licenses. A slot machine
manufacturer or distributor license is required for all persons who manufacture,
import or distribute slot machines in Colorado, or who otherwise act as slot
machine manufacturers or distributors.
The current practice of the Division of Gaming and the Colorado
Commission is to require every officer and director, or equivalent office
holders for non-corporate applicants, and 5% or greater beneficial shareholders
or owners of an applicant or licensee to complete background investigation
forms, provide comprehensive information and submit to a full background
investigation conducted by the Division of Gaming and the Colorado Commission.
The purpose of the investigation is to determine each such person's or entity's
qualifications and suitability for licensure. In addition, all persons loaning
monies, goods or real or personal property to a licensee or applicant, or having
any interest in a licensee or applicant, or entering into any agreement with a
licensee or applicant, must provide any information requested by the Division of
Gaming or the Colorado Commission; and, in the discretion of the Division of
Gaming or the Colorado Commission, these persons must supply all information
relevant to a determination of any such person's suitability for licensure and
must submit to a full background investigation if ordered by the Colorado
Commission.
Persons found unsuitable by the Colorado Commission may be required
immediately to terminate any interest in, association or agreement with or
relationship to a licensee. A finding of unsuitability with respect to any
officer, director, employee, associate, lender or beneficial owner of a licensee
or applicant also may jeopardize the licensee's license or the applicant's
license application. A license grant may be conditioned upon the termination of
any relationship with unsuitable persons.
The Colorado Act and the Colorado Regulations require licensees to
maintain detailed books and records that accurately account for all monies and
business transactions. Books and records must be furnished upon demand to the
Colorado Commission, the Division of Gaming and other law enforcement
authorities. The Colorado Regulations also establish detailed and extensive
playing procedures, standards, requirements and rules of play for poker,
blackjack and slot machines. Retail gaming licensees must, in addition, adopt
comprehensive internal control procedures governing their limited gaming
operations. Such procedures must be approved in advance by the Division of
Gaming and include the areas of accounting, surveillance, security, cashier
operations, key control and fill and drop procedures, among others.
Licensees have a continuing duty to report to the Colorado Commission
information concerning persons with a financial or equity interest in the
licensee, or who have the ability to control or exercise a significant influence
over the licensee, or who loan money to the licensee. Licensees are prohibited
from engaging in fraudulent acts, which include, among other things,
misrepresenting the probabilities of pay out, improperly canceling a bet and
conducting limited gaming without a valid license. Finally, licensees must
report to the Division of Gaming all licenses, and all applications for
licenses, in foreign jurisdictions.
With limited exceptions applicable to licensees that are publicly
traded entities, no person may sell, lease, purchase, convey or acquire any
interest in a retail gaming or operator license or business without the prior
approval of the Colorado Commission.
21
All agreements, contracts, leases, or arrangements in violation of
the Colorado Act or the Colorado Regulations are void and unenforceable.
All slot machines, cards, chips or tokens used in limited gaming must
be approved by the Division Director or the Colorado Commission. All such items
must meet standards established by the Division of Gaming and the Colorado
Commission.
Upon request, an applicant or licensee must submit to the Colorado
Commission or Director of Gaming written copies or summaries of all written or
oral gaming contracts to which it is or will be a party. A gaming contract
includes any agreement in which a person does business with a licensee. The
Colorado Commission or the Division Director may require changes in gaming
contracts or may require termination of a gaming contract. Parties to gaming
contracts may be required to provide all information relevant to a determination
of their suitability for licensing.
Colorado has enacted an annual tax on the adjusted gross proceeds
("AGP") from limited gaming. AGP is generally defined as the total amounts
wagered less all payments to players. With respect to games of poker, AGP means
those sums wagered in a hand retained by the licensee as compensation, which
must be consistent with the minimum and maximum amounts established by the
Colorado Commission. Currently, the gaming tax on AGP is: 2% on the first $2
million of AGP; 4% on AGP from $2 million to $4 million; 14% on AGP from $4
million to $5 million; 18% on AGP from $5 million to $10 million; and 20% on AGP
over $10 million. The gaming tax is paid monthly, with licensees required to
file returns by the 15th of the following month. Effective October 1 of each
year, the Colorado Commission establishes the gaming tax for the following 12
months. Under the Colorado Amendment, the Colorado Commission may increase the
gaming tax rate to as much as 40% of AGP.
The Colorado Commission requires all gaming licensees to pay an
annual device fee for each slot machine, blackjack table and poker table. The
current state device fee, established October 1, 1996, is $100. The
municipalities of Central City, Black Hawk and Cripple Creek also assess and
collect their own device fees. The current annual device fee in Black Hawk is
$750 per device. There is no statutory limit on state or city device fees, which
may be increased at the discretion of the state or city. The state device fee is
not prorated; a device used at any time during the year is assessed the full
state fee. Local device fees may be prorated according to device usage; the City
of Black Hawk currently prorates device fees such that any device used at any
time during a calendar quarter is subject to the device fee for such calendar
quarter. In addition, a business improvement fee of $100 per device and a
transportation impact fee of $77 per device also may apply depending upon the
location of the licensed premises.
Black Hawk also imposes taxes and fees on other aspects of the
businesses of gaming licensees, such as parking, alcoholic beverage licenses and
other municipal taxes and fees. Significant increases in these fees and taxes,
or the imposition of new taxes and fees, may occur.
Violations of the Colorado Act, or any of the Colorado Regulations,
is a criminal offense. Persons violating the Colorado Act or the Colorado
Regulations may, in addition to any gaming license suspension or revocation, be
subject to criminal prosecution resulting in incarceration, fines or both.
The sale of alcoholic beverages in gaming establishments is subject
to strict licensing, control, and regulation by state and local authorities.
Alcoholic beverage licenses are revocable and non-transferable. State and local
licensing authorities have full power to limit, condition, suspend or revoke any
such licenses. Violation of the state alcoholic beverage laws may constitute a
criminal offense, and violators may be subject to criminal prosecution,
incarceration and fines. A gaming establishment that sells or provides alcoholic
beverages is required to have a retail gaming tavern license.
22
There are various classes of alcoholic beverage licenses under the
Colorado Liquor Code. However, only a retail gaming tavern license may be issued
to persons who are licensed pursuant to the Colorado Act. A retail gaming tavern
licensee may sell malt, vinous or spirituous liquors only by individual drinks
for consumption on the premises and must also make available sandwiches or light
snacks or contract with concessionaires to provide food services within the same
building as the licensed premises. In no event may any person hold more than or
have an interest in more than three retail gaming tavern licenses. An
application for an alcoholic beverage license in Colorado requires notice,
posting and a public hearing before the local liquor licensing authority. The
Department's Liquor Enforcement Division also must approve the application.
In addition to the other requirements of the gaming laws, the
Colorado Commission has enacted a special rule, Rule 4.5, which imposes
additional requirements on publicly traded corporations holding gaming licenses
in Colorado and on gaming licensees in Colorado owned directly or indirectly,
five percent or more, by publicly traded corporations. The term "publicly traded
corporation" is a specially defined term and may include limited liability
companies, trusts, partnerships and other business organizations, and may even
include entities exempted from the registration requirements of the securities
laws under certain circumstances.
Under Rule 4.5, gaming licensees, affiliated companies and
controlling persons thereof must notify the Colorado Commission within 10 days
of the initial filing of a registration statement with the Securities and
Exchange Commission. Licensed publicly traded corporations are also required to
send proxy statements to the Division of Gaming within 5 days after distribution
of such statement, and to follow a variety of other reporting requirements.
Licensees to whom Rule 4.5 applies must include in their articles of
organization or similar charter documents certain specified provisions that:
restrict the rights of the licensee to issue voting interests or securities
except in accordance with the Colorado gaming laws; limit the rights of persons
to transfer voting interests or securities of a licensee except in accordance
with the Colorado gaming laws; and provide that holders of voting interests or
securities of a licensee found unsuitable by the Colorado Commission may be
required to sell their interests or securities back to the issuer at the lesser
of, in general terms, the holder's investment or the market price as of the date
of the finding of unsuitability. Alternatively, and with authorization by the
Colorado Commission, the holder may in limited circumstances transfer the voting
interests or securities to a suitable person (as determined by the Colorado
Commission). Until the voting interests or securities are held by suitable
persons, the issuer may not pay dividends or interest on them, the interests or
securities may not be voted, or entitled to any vote, and they may not be
included in the voting or securities of the issuer, and the issuer may not pay
any remuneration in any form to the holder of the securities or interests.
Pursuant to Rule 4.5, persons who acquire direct or indirect
beneficial ownership of (i) 5% or more of any class of the voting securities of
a publicly traded corporation required to contain the Rule 4.5 charter language
provisions, or (ii) 5% or more of the beneficial interest in a gaming licensee
directly or indirectly through any class of voting securities of any holding
company or intermediary company of a licensee (all such persons hereinafter
referred to as "qualifying persons"), must notify the Division of Gaming within
10 days of such acquisition, are required to submit all requested information
and are subject to a finding of suitability. Licensees also must notify any
qualifying persons of these requirements. A qualifying person whose interests
equal 10% or more must apply to the Colorado Commission for a finding of
suitability within 45 days after acquiring such securities. Licensees must also
notify any qualifying persons of these requirements. Whether or not notified,
qualifying persons are responsible for complying with these requirements.
A qualifying person who is an institutional investor under Rule 4.5
and whose interests equal 15% or more must apply to the Colorado Commission for
a finding of suitability within 45 days after acquiring such interests. A
qualifying person who is an institutional investor and whose interests equal
23
10% or more, but less than 15%, may not be required to apply for suitability,
provided such person fulfills certain reporting requirements.
Pursuant to Rule 4.5, persons found unsuitable by the Colorado
Commission must be removed from any position as an officer, director, or
employee of a licensee, or from a holding or intermediary company thereof. Such
unsuitable persons also are prohibited from any beneficial ownership of the
voting securities of any such entities. Licensees, or affiliated entities of
licensees, are subject to sanctions for paying dividends to persons found
unsuitable by the Colorado Commission, or for recognizing voting rights of, or
paying a salary or any remuneration for services to, unsuitable persons.
Licensees or their affiliated entities also may be sanctioned for failing to
pursue efforts to require unsuitable persons to relinquish their interests. The
Colorado Commission may determine that anyone with a material relationship to a
licensee, or affiliated company, must apply for a finding of suitability.
RBL currently holds no gaming or liquor licenses and will therefore
have to make applications for both types of licenses in connection with the
Black Hawk Project. The failure or inability to obtain such licensing could
materially and adversely affect the Black Hawk Project.
Federal Registration
ROC is required to annually file with the Attorney General of the
United States in connection with the sales, distribution, or operations of slot
machines. All requisite filings for the present year have been made.
Item 2. Properties
The Riviera complex is located on the Las Vegas Strip, occupies
approximately 26 acres and comprises approximately 1,700,000 square feet,
including 105,000 square feet of casino space, 100,000 square foot convention,
meeting and banquet facility, approximately 2,100 hotel rooms (including
approximately 169 luxury suites) in five towers, four restaurants, a buffet,
four showrooms, a lounge and approximately 2,900 parking spaces. In addition,
executive and other offices for the Riviera are located on the property.
There are 47 food and retail concessions operated under individual
leases with third parties. The leases are for periods from one year to ten years
and expire over the next five years.
The entire Riviera complex is encumbered by a first deed of trust
securing the First Mortgage Notes. See "Item 7-Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Liquidity and
Capital Resources."
Item 3. Legal Proceedings
The Company is a party to several routine lawsuits both as plaintiff
and as defendant arising from the normal operations of a hotel. Management does
not believe that the outcome of such litigation, in the aggregate, will have a
material adverse effect on the financial position or results of operations of
the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
24
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
The Company's Common Stock began trading on the American Stock
Exchange on May 13, 1996 and was reported on the NASDAQ Bulletin Board prior to
that date. As of March 4, 1997, based upon information available to it, the
Company believes that there were approximately 1,319 beneficial holders of the
Company's Common Stock.
The Company has never paid any dividends on its Common Stock and does
not currently expect to pay any dividends (cash or otherwise) on its Common
Stock for the foreseeable future. The Company's ability to pay dividends is
primarily dependent upon receipt of dividends and distributions from ROC. In
addition, the indenture for the First Mortgage Notes restricts the Company's
ability to pay dividends on its Common Stock.
The table below sets forth the bid and ask sales prices by quarter
for the years ended December 31, 1995 and 1996, based on information provided by
certain brokers who have had transactions in the Company's Common Stock during
the year:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1996
----
BID $ 7.50 $11.00 $14.00 $12.94
ASK 9.75 17.75 17.13 15.63
1995
----
BID 3.00 3.50 8.25 7.00
ASK 4.63 9.13 11.50 10.00
On March 4, 1997 (the most recent trade date of the Company's common stock),
1,200 shares were traded closing at $14.125 per share.
25
Item 6. Selected Financial Data
The following table sets forth a summary of selected financial data
for the Company and its predecessor for the years ended December 31:
Year
Ended Six Months Ended Years Ended December 31,
Dec. 31, June 30, Dec. 31, Combined
1992 1993 1993 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ -----
(Predecessor) (Predecessor) (Successor)
(dollars in thousands*)
Total Operating $144,502 $72,702 $76,221 $148,923 $153,921 $151,145 $164,409
Revenue, net
Net Income (Loss) (80,905)(1)(2) 5,628(2) 2,607 8,235(2) 4,790 6,344 8,440
Net Income (Loss) N/A N/A $.54 N/A $1.00 $1.26 $1.63
Per Common Share
Total Assets 143,631 150,836 143,704 143,704 151,925 157,931 167,665
Long Term Debt 133,255 119,959 114,540 114,540 113,154 110,571 109,088
________________
* Except for Net Income (Loss) Per Common Share
(1) Includes a recognized loss on the permanent impairment of assets during
the bankruptcy in the amount of $85.2 million to record the fair market
value of the property and equipment.
(2) There was no accrual of interest on debt subsequent to December 18,
1991. If accrued, interest expense on these obligations would have
totaled $21.4 million and $10.4 million for the year ended December
31, 1992 and for the six months ended June 30, 1993, respectively.
26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth the Company's income statement data as
a percentage of net revenues (unless otherwise noted) for the Company for the
periods indicated:
1994 1995 1996
---- ---- ----
Revenues:
Casino......................................... 53.3% 51.2% 48.9%
Rooms.......................................... 23.0 26.4 25.4
Food and Beverage.............................. 14.9 14.5 13.8
Entertainment.................................. 11.0 9.5 12.7
Other.......................................... 6.1 6.3 6.9
Less promotional allowances................... (8.3) (7.9) (7.7)
------- ------- -------
Net revenues 100.0 100.0 100.0
Costs and Expenses:
Casino(1)...................................... 59.5 58.6 59.1
Rooms(1)....................................... 49.7 47.1 45.0
Food and Beverage(1)........................... 67.9 72.0 70.3
Entertainment(1)............................... 82.5 71.6 73.2
Other(1)....................................... 37.4 37.1 34.6
Selling, general and administrative............ 18.7 19.6 19.1
Depreciation and amortization.................. 3.7 4.5 5.0
Total Costs and Expenses.......................... 87.1 86.1 85.8
Income from operations............................ 12.9 13.9 14.2
Interest expense, net............................. 8.0 7.5 6.3
------- ------- -------
Income before provision for income taxes.......... 5.0 6.4 7.8
Provision for income taxes....................... (1.9) (2.2) (2.7)
------- ------- -------
Net Income 3.1% 4.2% 5.1%
(1) Shown as a percentage of corresponding departmental revenue.
1996 Compared to 1995
Revenues
Net revenues increased by approximately $13.3 million, or 8.8%, from
$151.1 million in 1995 to $164.4 million in 1996. Casino revenues increased by
approximately $3.0 million, or 3.9%, from $77.3 million in 1995 to $80.4 million
in 1996 due primarily to a $2.9 million, or 5.4%, increase in slot revenues as a
result of an increase in promotional activities directed at slot players. Room
revenues increased by approximately $2.0 million, or 5.0%, from $39.8 million in
1995 to $41.8 million in 1996 as a result of an increase in hotel occupancy from
97.0% to 98.2% (based on available rooms) and an increase in average room rate
of $2.40, or 4.4%. Food and beverage revenues increased approximately $700,000,
or 3.4%, from $21.9 million in 1995 to $22.6 million in 1996 due to additional
covers in the bars and restaurants. Entertainment revenues increased by
approximately $6.5 million, or 44.8%, from $14.4 million in 1995 to $20.9
million in 1996. This was principally due to the reopening of the Splash variety
show which had been closed during the first half of 1995 for show revisions and
theater
27
remodeling. Other revenues increased by approximately $1.8 million, or 18.7%,
from $9.5 million in 1995 to $11.3 million in 1996 due primarily to a refund of
$576,000 from a union health and welfare trust fund for reduced premiums and
general increases in other revenues such as telephone, gift shops and box office
commissions. In addition, the Company received management fees of approximately
$400,000 for operating the Four Queens Hotel/Casino in downtown Las Vegas
beginning in August 1996. Promotional allowances increased by approximately
$700,000, or 6.4%, from $11.9 million in 1995 to $12.6 million in 1996 due to
additional complimentary show tickets for the Splash show and an increase in
complimentaries associated with casino and slot marketing programs.
Direct Costs and Expenses of Operating Departments
Total direct costs and expenses of operating departments increased by
approximately $7.7 million, or 8.2%, from $93.7 million in 1995 to $101.5
million in 1996. Casino expenses increased by approximately $2.2 million, or
4.8%, from $45.3 million in 1995 to $47.5 million in 1996 due to a corresponding
increase in casino revenues and casino expenses as a percent of casino revenues
increased from 58.6% to 59.1%, primarily due to increased entertainment
promotional allowances upon the reopening of Splash on June 23, 1995. Room costs
were mostly flat for 1996 compared to 1995, however, room costs as a percentage
of room revenues decreased from 47.1% in 1995 to 45.0% in 1996 as room revenues
increased while room costs remained relatively constant. Food and beverage costs
increased by approximately $150,000, or 0.9%, from $15.8 million in 1995 to
$15.9 million in 1996 resulting from a corresponding increase in revenues. Food
and beverage costs as a percentage of food and beverage revenues decreased from
72.0% in 1995 to 70.3% in 1996 because food and beverage revenue increased while
payroll and other costs remained relatively constant. Entertainment costs
increased by approximately $5.0 million, or 48.0%, from $10.3 million in 1995 to
$15.3 million in 1996, due to the additional expenses associated with operating
Splash for a full year in 1996. Entertainment expenses as a percentage of
entertainment revenues increased from 71.6% in 1995 to 73.2% in 1996 due to a
revision in the Splash producer's agreement. Other expenses increased by
approximately $400,000, or 10.9%, from $3.5 million to $3.9 million due to a
corresponding increase in other revenues.
Other Operating Expenses
Selling, general and administrative expenses increased by
approximately $1.8 million, or 6.2%, from $29.6 million in 1995 to $31.5 million
in 1996 due to increased incentive plan costs required to retain personnel in
the competitive gaming environment. As a percentage of total net revenues,
selling, general and administrative expenses decreased from 19.6% in 1995 to
19.1% in 1996 as a result of lower general marketing expenses and the spreading
of fixed costs over a larger revenue base in 1996. Depreciation and amortization
increased by approximately $1.4 million, or 20.6%, from $6.8 million in 1995 to
$8.2 million in 1996.
Other Income (Expense)
Interest expense decreased by approximately $400,000, or 3.0%, from
$12.5 million in 1995 to $12.1 million in 1996 while interest income remained
constant at $1.1 million in 1995 and 1996. This was due to a reduction in
average debt outstanding, an increase in average cash balances and a decrease in
the investment yield in 1996. Other income increased by $505,000 due to a gain
on the final payment of certain unsecured notes in the fourth quarter of 1996
offset by a loss due to the change in terms of one of the Company's notes.
28
Net Income
As a result of the factors discussed above, net income increased by
approximately $2.1 million, or 33.0%, from $6.3 million in 1995 to $8.4 million
in 1996. The effective income tax rate was 34.4% for 1995 and 1996.
EBITDA
EBITDA increased by approximately $3.7 million, or 13.3%, from $27.8
million in 1995 to $31.5 million in 1996. During the same periods, EBITDA margin
increased from 18.4% to 19.2% of net revenues.
1995 Compared to 1994
Revenues
Net revenues decreased by approximately $2.8 million, or 1.8%, from
$153.9 million in 1994 to $151.1 million in 1995. Casino revenues decreased by
approximately $4.7 million, or 5.8%, from $82.1 million in 1994 to $77.3 million
in 1995 which was largely due to an approximately $5.9 million, or 22.9%,
decrease in table game revenues as a result of reduced "high-roller" play and
the elimination of unprofitable marketing programs offset by an approximately
$1.3 million, or 2.8%, increase in slot machine revenues. Room revenues
increased by approximately $4.4 million, or 12.5%, from $35.4 million in 1994 to
$39.8 million in 1995 due to a slight decrease in occupancy offset by an
increase of $7.18 in the average room rate. Food and beverage revenues decreased
approximately $1.1 million, or 4.6%, from $23.0 million in 1994 to $21.9 million
in 1995, principally due to reduced covers resulting from the decline in
customer traffic as a result of Splash being closed for six months in 1995
compared to one month in 1994. Entertainment revenues decreased by approximately
$2.5 million, or 14.9%, from $16.9 million in 1994 to $14.4 million in 1995 due
primarily to the closure of Splash from November 1994 to June 1995. Other income
increased by approximately $125,000, or 1.3%, from $9.4 million in 1994 to $9.5
million in 1995. Promotional allowances decreased by approximately $1.0 million,
or 7.7%, from $12.9 million in 1994 to $11.9 million in 1995, primarily due to
the elimination of certain marketing programs.
Direct Costs and Expenses of Operating Departments
Total direct costs and expenses of operating departments decreased by
approximately $5.8 million, or 5.8%, from $99.5 million in 1994 to $93.7 million
in 1995. Casino expenses decreased by approximately $3.5 million, or 7.2%, from
$48.8 million in 1994 to $45.3 million in 1995 due to a corresponding decrease
in casino revenues. Casino expenses as a percentage of casino revenues decreased
from 59.5% in 1994 to 58.6% in 1995 due to reduced complimentaries. Room costs
increased by approximately $1.2 million, or 6.8%, from $17.6 million in 1994 to
$18.8 million in 1995, principally due to the payment of higher credit card and
travel agent commissions associated with the increase in room revenues. Room
costs as a percentage of room revenues decreased from 49.7% in 1994 to 47.1% in
1995 as a result of certain fixed costs being allocated over a larger revenue
base. Food and beverage costs increased by approximately $180,000, or 1.2%, from
$15.6 million in 1994 to $15.8 million in 1995. As a percentage of food and
beverage revenues, costs increased from 67.9% in 1994 to 72.0% in 1995 because
certain fixed costs could not be reduced commensurate with the reduction of
revenue.
29
Entertainment costs decreased by approximately $3.7 million, or 26.1%, from
$14.0 million in 1994 to $10.3 million in 1995 due to Splash being closed during
the first half of 1995. Entertainment costs as a percentage of entertainment
revenues decreased from 82.5% in 1994 to 71.6% in 1995 due to better contract
terms with the producer of Splash. Other expenses remained constant at $3.5
million in 1995.
Other Operating Expenses
Selling, general and administrative expenses increased by
approximately $800,000, or 2.8%, from $28.8 million in 1994 to $29.6 million in
1995. As a percentage of total net revenues, selling, general and administrative
expenses increased from 18.7% in 1994 to 19.6% in 1995 due to increases in
payroll and maintenance offset by a decrease in workers' compensation insurance
expense resulting from the Company becoming self-insured and a decrease in the
provision for bad debts as a result of stricter credit policies during 1995.
Depreciation and amortization increased by approximately $1.1 million, or 20.0%,
from $5.7 million in 1994 to $6.8 million in 1995.
Other Income (Expense)
Interest expense decreased by approximately $311,000, or 2.4%, from
$12.8 million in 1994 to $12.5 million in 1995, while interest income more than
doubled from approximately $510,000 to $1.1 million. This was due to a reduction
in average debt outstanding and an increase in average cash balances,
respectively, during 1995 compared to 1994.
Net Income
As a result of the factors discussed above, net income increased by
approximately $1.6 million, or 32.4%, from $4.8 million in 1994 to $6.3 million
in 1995. The effective income tax rate for 1995 was 34.4% compared to 37.5% for
1994.
EBITDA
EBITDA increased by approximately $2.2 million, or 8.6%, from $25.6
million in 1994 to $27.8 million in 1995. During the same periods, EBITDA margin
increased from 16.6% to 18.4% of net revenues.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $25.7 million at
December 31, 1996, which was an increase of $3.8 million from the balances at
December 31, 1995. Significant debt service on the First Mortgage Notes and
other debt issued pursuant to the Plan is paid in June and December and should
be considered in evaluating cash increases in the first and third quarters.
For the year ended December 31, 1996, the Company's net cash provided
by operating activities was $18.3 million compared to $16.7 million for 1995.
EBITDA for 1996 and 1995 was $31.5 million and $27.8 million, respectively,
which was adequate to cover the Company's debt service and capital expenditures.
Management believes that sufficient cash flow will be available to cover the
Company's debt service and enable investment in budgeted capital expenditures
for the next 12 months.
30
Scheduled interest payments on the First Mortgage Notes and other
indebtedness are $12.1 million in 1996 declining to $11.0 million in 2002. Cash
flow from operations is not expected to be sufficient to pay 100% of the
principal of the First Mortgage Notes at maturity in 2002. Accordingly, the
ability of the Company to repay the First Mortgage Notes at maturity will be
dependent upon its ability to refinance the First Mortgage Notes. There can be
no assurance that the Company will be able to refinance the principal amount of
the First Mortgage Notes at maturity. The First Mortgage Notes are not
redeemable at the option of the Company until June 1, 1998, and thereafter are
redeemable at premiums beginning at 104.3125% and declining each subsequent year
to par in 2001.
The Note Indenture provides for mandatory redemption by the Company
upon the order of the Nevada Gaming Authorities. The Note Indenture also
provides that, in certain circumstances, the Company must offer to repurchase
the First Mortgage Notes upon the occurrence of a change of control or certain
other events. In the event of such mandatory redemption or repurchase prior to
maturity, the Company would be unable to pay the principal amount of the First
Mortgage Notes without a refinancing.
The Note Indenture imposes certain financial covenants and
restrictions on the Company and ROC, including a minimum consolidated net worth
requirement and limitations on the payment of dividends, the incurrence of debt
and granting of liens, capital expenditures and mergers and sales of assets. As
a result of these restrictions, the ability of the Company and ROC to incur
additional indebtedness to fund operations or to make capital expenditures is
limited. In the event that cash flow from operations is insufficient to cover
cash requirements, the Company and ROC may not be able to obtain additional
funds. The Company and ROC would be required to curtail or defer certain of
their capital expenditure programs under these circumstances, which could have
an adverse effect on the Company's operations.
Effective September 8, 1995, the Note Indenture was amended to permit
the Company's management team to utilize its expertise in turning around
troubled gaming properties which are either in, or on the verge of, bankruptcy
and managing casinos in "new venues."
In February 1997, the Company entered into a $15.0 million, five
year reducing revolving line of credit collateralized by equipment (the "Credit
Facility"). The revolving line of credit bears interest at prime plus 0.5% or
LIBOR plus 2.9%. The Company has not utilized this line of credit.
During the reorganization proceeding of Riviera, Inc., certain
capital expenditures were deferred. Management considers it important to the
competitive position of the Riviera that expenditures be made to upgrade the
property. Capital expenditures totaled approximately $8.9 million in 1994, $7.8
million in 1995 and $14.9 million in 1996. Management has budgeted approximately
$13.0 million for capital expenditures in 1997. The Company expects to finance
such capital expenditures from cash flow and the Credit Facility.
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. Certain matters discussed in
this filing could be characterized as forward-looking statements such as
statements relating to plans for future expansion, as well as other capital
spending, financing sources and effects of regulation and competition. Such
forward-looking
31
statements involve important risks and uncertainties that could cause actual
results to differ materially from those expressed in such forward-looking
statements.
Recently Adopted Accounting Standards
During 1996 the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121 ("SFAS 121") Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
SFAS 121 requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The adoption of
SFAS 121 had no impact on the financial statements of the Company.
In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS 123 Accounting for Stock-Based Compensation which establishes
financial accounting and reporting standards for stock-based employee
compensation plans and for transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. The Company
continues to account for stock-based compensation arrangements in accordance
with Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees" and therefore the adoption of SFAS 123 had no effect on the financial
position or results of operations of the Company. The Company has provided the
pro forma and other additional disclosures about stock-based employee
compensation plans in its 1996 consolidated financial statements as required by
SFAS 123.
Item 8. Financial Statements and Supplementary Data, etc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Table of Contents............................................................F-1
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996.................F-3
Consolidated Statements of Income for the Years Ended
December 31, 1994, 1995 and 1996...........................................F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996...........................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996...........................................F-6
Notes to Consolidated Financial Statements...................................F-7
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
32
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding this item is incorporated by reference to the
Company's Proxy Statement dated April 16, 1997, relating to the Annual Meeting
of Stockholders to be held on May 8, 1997, and is made a part hereof.
Item 11. Executive Compensation
Information regarding this item is incorporated by reference to the
Company's Proxy Statement dated April 16, 1997, relating to the Annual Meeting
of Stockholders to be held on May 8, 1997, and is made a part hereof.
Item 12. Principal Shareholders
Information regarding this item is incorporated by reference to the
Company's Proxy Statement dated April 16, 1997, relating to the Annual Meeting
of Stockholders to be held on May 8, 1997, and is made a part hereof.
Item 13. Certain Relationships and Related Transactions
Information regarding this item is incorporated by reference to the
Company's Proxy Statement dated April 16, 1997, relating to the Annual Meeting
of Stockholders to be held on May 8, 1997, and is made a part hereof.
33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) List of Financial Statements.
The following Consolidated Financial Statements of the Company and
the Independent Auditors' Report set forth on pages F-3 through F-18 and F-2,
respectively, are incorporated by reference into this Item 14 of Form 10-K by
Item 8 hereof:
- Consolidated Balance Sheets as of December 31, 1995 and
1996.
- Consolidated Statements of Income for the Years Ended
December 31, 1994, 1995 and 1996.
- Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1994, 1995 and 1996.
- Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996.
- Notes to Consolidated Financial Statements.
- Independent Auditors' Report.
(a)(2) List of Financial Statement Schedules.
No financial statement schedules have been filed herewith since they
are either not required, are not applicable, or the required information is
shown in the consolidated financial statements or related notes.
(a)(3) List of Exhibits.
Exhibit
Number Description
- ------ -----------
3.1* Amended and Restated Articles of Incorporation of the
Registrant filed June 18, 1993 (see Exhibit 3.1 to
Registration Statement Form S-1 filed with the Commission on
August 11, 1993)
3.2* Bylaws of the Registrant (see Exhibit 3.2 to Registration
Statement Form S-1 filed with the Commission on August 11,
1993)
10.1* Lease Agreement between Riviera, Inc. and Mardi Gras Food
Court, Inc. dated April 1, 1990 (see Exhibit 10.1 to Form
10, Commission File No. 0-21430)
10.2* Amendment to Lease Agreement between Riviera, Inc. and Mardi
Gras Food Court, Inc. dated April 1, 1990 (see Exhibit 10.2
to Registration Statement Form S-1 filed with the Commission
on August 11, 1993)
10.3* Lease Agreement between Riviera, Inc. and Leroy's Horse and
Sports Place (see Exhibit 10.3 to Form 10, Commission File
No. 0-21430)
10.4* Equipment Lease between Riviera, Inc. and G.E. Capital
Corporation (successor in interest to RCA Service Company)
(see Exhibit 10.4 to Form 10, Commission File No. 0-21430)
10.5* Sales and Security Agreement for Slot Equipment between
Riviera, Inc. and Bally Distributing of Nevada, Inc. and
Order re: Motion to Approve Adequate Protection Payments
(see Exhibit 10.5 to Form 10, Commission File No. 0-21430)
10.6* Documents Relating to Sale by Universal Distributing of
Nevada, Inc. of Slot Equipment to Riviera, Inc. and
Stipulation and Order re: Modification of Automatic Stay and
Compromise of Claim (see Exhibit 10.6 to Form 10, Commission
File No. 0-21430)
10.7* Indemnity Agreement, dated June 30, 1993, from Riviera, Inc.
and Meshulam Riklis in favor of the Registrant and Riviera
Operating Corporation (see Exhibit 10.7 to Registration
Statement Form S-1 filed with the Commission on August 11,
1993)
10.8* Indemnity Agreement, dated June 30, 1993, from the
Registrant in favor of IBJ Schroder Bank & Trust Company
(see Exhibit 10.8 to Registration Statement Form S-1 filed
with the Commission on August 11, 1993)
10.9* Equity Registration Rights Agreement, dated June 30, 1993,
among the Registrant and the Holders of Registerable Shares
(see Exhibit 10.9 to Registration Statement Form S-1 filed
with the Commission on August 11, 1993)
10.10* The Registrant's Class 4 Unsecured Promissory Note (see
Exhibit 10.10 to Registration Statement Form S-1 filed with
the Commission on August 11, 1993)
10.11* The Registrant's Class 5 (Sequoia "A") Unsecured Promissory
Note (see Exhibit 10.11 to Registration Statement Form S-1
filed with the Commission on August 11, 1993)
35
10.12* The Registrant's Class 5 (Sequoia "B") Unsecured
Promissory Note (see Exhibit 10.12 to Registration
Statement Form S-1 filed with the Commission on August 11,
1993)
10.13* The Registrant's Class 12 Non-Negotiable Unsecured
Promissory Note (see Exhibit 10.13 to Registration Statement
Form S-1 filed with the Commission on August 11, 1993)
10.14* The Registrant's Class 13/14 Unsecured Promissory Note (see
Exhibit 10.14 to Registration Statement Form S-1 filed with
the Commission on August 11, 1993)
10.15* Operating Agreement, dated June 30, 1993, between the
Registrant and Riviera Operating Corporation (see Exhibit
10.15 to Registration Statement Form S-1 filed with the
Commission on August 11, 1993).
10.16* Adoption Agreement regarding Profit Sharing and 401(k) Plans
of the Registrant (see Exhibit 10.16 to Registration
Statement Form S-1 filed with the Commission on August 11,
1993)
10.17* Howard Johnson & Company Regional Defined Contribution Plan,
dated March 16, 1990 (adopted by the Registrant pursuant to
the Adoption Agreement filed as Exhibit 10.17 to
Registration Statement Form S-1 filed with the Commission on
August 11, 1993)
10.18* Employment Agreement between Riviera, Inc. and William L.
Westerman, dated January 6, 1993 (see Exhibit 10.18 to Form
10, Commission File No. 0-21430)
10.19* Form of Agreement between the Registrant and Directors (see
Exhibit 10.19 to Form 10, Commission File No. 0-21430)
10.20* Form of Termination Fee Agreement (see Exhibit 10.20 to Form
10, Commission File No. 0-21430)
10.21* Form of Employment Agreement between Riviera, Inc. and
Albert Rapuano, dated January 6, 1993 (see Exhibit 10.21 to
Form 10, Commission File No. 0-21430)
10.22* Implementation Agreement between Riviera, Inc. and Albert
Rapuano (see Exhibit 10.21 to Amendment No. 1 to
Registration Statement Form S-1 filed with the Commission on
August 19, 1993)
36
10.23* Restricted Account Agreement, dated June 30, 1993, among
Riviera Operating Corporation, IBJ Schroder Bank & Trust
Company and Bank of America Nevada (see Exhibit 10.22 to
Registration Statement Form S-1 filed with the Commission on
August 11, 1993)
10.24* Disbursement Agreement, dated June 30, 1993, between the
Registrant and IBJ Schroder Bank & Trust Company (see
Exhibit 10.23 to Registration Statement Form S-1 filed with
the Commission on August 11, 1993)
10.25* Tax Sharing Agreement between the Registrant and Riviera
Operating Corporation dated June 30, 1993 (see Exhibit 10.24
to Amendment No. 1 to Registration Statement Form S-1 filed
with the Commission on August 19, 1993)
10.26* The Registrant's 1993 Stock Option Plan (see Exhibit 10.25
to Amendment No. 1 to Registration Statement Form S-1 filed
with the Commission on August 19, 1993)
10.27* Form of Stay Bonus Agreement (See, Exhibit 10.27 to Form
10-Q filed with the Commission November 9, 1994.
10.28* Amendment dated February 19, 1995, to Lease Agreement
between Riviera, Inc. and Mardi Gras Food Court, Inc. (See,
Exhibits 10.1 --- and 10.2)
10.29* Amendment dated September 30, 1994, to Employment Agreement
between Riviera, Inc. and William L. Westerman. (See,
Exhibit 10.18)
10.30 Management Agreement by and between Elsinore Corporation,
Four Queens, Inc. and Riviera Gaming Management Corp. -
Elsinore
10.31 Employment Agreement dated as of November 21, 1996 by and
between the Registrant, Riviera Operating Corporation and
William L. Westerman
10.32 Revolving Line of Credit Loan Agreement dated Februaruy 28,
1997 by and between the Registrant, Riviera Operating
Corporation and U.S. Bank of Nevada
10.33 Letter of Intent dated March 4, 1997 between the Registrant
and Eagle Gaming, L.P.
37
* The exhibits thus designated are incorporated herein by reference as exhibits
hereto. Following the description of such exhibits is a reference to the copy of
the exhibit heretofore filed with the Commission, to which there have been no
amendments or changes.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed with the Commission during the
fourth quarter ended December 31, 1996.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
RIVIERA HOLDINGS CORPORATION
By:/s/ WILLIAM L. WESTERMAN
-----------------------------------
William L. Westerman
Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Chairman of the Board,
/s/ WILLIAM L. WESTERMAN Chief Executive Officer March 10, 1997
- ---------------------------- and President
William L. Westerman
Treasurer (Principal
/s/ DUANE R. KROHN Financial and Accounting March 10, 1997
- ---------------------------- Officer)
Duane R. Krohn
/s/ ROBERT R. BARENGO Director March 10, 1997
- ----------------------------
Robert R. Barengo
/s/ WILLIAM FRIEDMAN Director March 10, 1997
William Friedman
/s/ PHILIP P. HANNIFIN Director March 10, 1997
- ----------------------------
Philip P. Hannifin
39
RIVIERA HOLDINGS CORPORATION
TABLE OF CONTENTS
Page
----
Independent Auditors' Report..............................................F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996..............F-3
Consolidated Statements of Income for the Years Ended
December 31, 1994, 1995 and 1996.......................................F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1994, 1995 and 1996...........................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996.......................................F-6
Notes to Consolidated Financial Statements................................F-7
F-1
INDEPENDENT AUDITORS' REPORT
Riviera Holdings Corporation
d.b.a. Riviera Hotel & Casino
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Riviera
Holdings Corporation and subsidiaries (the "Company") d.b.a. Riviera Hotel &
Casino as of December 31, 1995 and 1996, and the related consolidated statements
of income, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1995 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
February 28, 1997
F-2
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
1995 1996
---- ----
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents (Note 1)........................................ $21,962 $25,747
Accounts receivable, net (Notes 1 and 2).................................. 4,334 5,113
Inventories (Note 1)...................................................... 2,186 3,039
Prepaid expenses and other assets......................................... 2,602 2,692
------- -------
Total current assets................................................... 31,084 36,591
Property and Equipment, Net (Notes 1, 3, 5 and 7)........................... 121,049 127,760
Other Assets................................................................ 4,759 2,853
Restricted Cash For Periodic Slot Payments (Notes 1 and 5).................. 1,039 461
------- -------
Total Assets...................................................... $157,931 $167,665
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 5)................................ $2,322 $1,550
Accounts payable (Notes 1 and 4).......................................... 8,364 8,530
Current income taxes payable (Note 6)..................................... 51 413
Accrued expenses (Notes 1 and 4).......................................... 9,640 9,757
------- -------
Total current liabilities.............................................. 20,377 20,250
------- -------
Deferred Income Taxes Payable (Note 6)...................................... 3,023 4,626
------- -------
Long-Term Debt, Net of Current Portion (Notes 1 and 5)...................... 108,249 107,538
------- -------
Commitments and Contingencies (Notes 5, 7, 8, 9, 10 and 12)
Shareholders' Equity: (Notes 1 and 11)
Common stock ($.001 par value; 20,000,000 shares
authorized; 4,800,000 shares at December 31, 1995
and 4,922,503 shares at December 31, 1996 issued
and outstanding)....................................................... 5 5
Additional paid-in capital................................................ 12,537 13,919
Notes receivable from employee shareholders............................... -- (853)
Retained earnings......................................................... 13,740 22,180
------- -------
Total shareholders' equity............................................. 26,282 35,251
------- -------
Total Liabilities and Shareholders' Equity........................ $157,931 $167,665
======== ========
See notes to consolidated financial statements.
F-3
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
-----------------------------------------
1994 1995 1996
---- ---- ----
(in thousands, except share data)
Revenues: (Note 1)
Casino....................................................... $82,060 $77,337 $80,384
Rooms........................................................ 35,422 39,848 41,835
Food and beverage............................................ 22,961 21,895 22,641
Entertainment................................................ 16,945 14,423 20,883
Other (Notes 7 and 9)........................................ 9,390 9,515 11,293
-------
166,778 163,018 177,036
Less promotional allowances (Note 1)......................... 12,857 11,873 12,627
-------
Net revenues......................................... 153,921 151,145 164,409
-------
Costs and expenses: (Notes 1, 7 and 10)
Direct costs and expenses of operating
departments:
Casino.................................................... 48,826 45,325 47,509
Rooms..................................................... 17,594 18,787 18,834
Food and beverage......................................... 15,588 15,768 15,916
Entertainment............................................. 13,982 10,329 15,290
Other..................................................... 3,516 3,527 3,913
Other operating expenses:
Selling, general and administrative....................... 28,822 29,618 31,454
Depreciation and amortization............................. 5,674 6,811 8,212
---------
Total costs and expenses............................. 134,002 130,165 141,128
---------
Income from operations......................................... 19,919 20,980 23,281
---------
Other income (expense):
Interest expense (Notes 5 and 7)............................. (12,764) (12,453) (12,085)
Interest income.............................................. 510 1,149 1,167
Other, net (Note 5).......................................... -- -- 505
---------
Total other income (expense)......................... (12,254) (11,304) (10,413)
---------
Income before provision for income taxes....................... 7,665 9,676 12,868
Provision for income taxes (Notes 1 and 6)..................... 2,875 3,332 4,428
---------
Net income..................................................... $ 4,790 $ 6,344 $ 8,440
=========
Weighted average common and common equivalent
shares outstanding (Notes 1 and 11).......................... 4,800,000 5,040,720 5,177,809
=========
Net income per common and common equivalent shares
(Notes 1 and 11)............................................. $ 1.00 $ 1.26 $ 1.63
=========
See notes to consolidated financial statements.
F-4
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1994, 1995 and 1996
(in thousands, except share data)
Notes
Receivable
Additional from
Shares Common Paid-in Retained Employee
Outstanding Stock Capital Earnings Shareholders Total
----------- ----- ------- -------- ------------ -----
Balances, January 1, 1994............ 4,800,000 $ 5 $12,537 $2,606 -- $15,148
Net income........................... -- -- -- 4,790 -- 4,790
---------- --- ------- ------- ----- -------
Balances, December 31, 1994.......... 4,800,000 5 12,537 7,396 -- 19,938
Net income........................... -- -- -- 6,344 -- 6,344
---------- --- ------- ------- ----- -------
Balances, December 31, 1995.......... 4,800,000 5 12,537 13,740 -- 26,282
Stock issued under Employee
Stock Purchase Plan................ 137,000 -- 1,543 -- $(1,383) 160
Collections of shareholders'
receivables........................ -- -- -- -- 332 332
Refunds on employee stock
purchases.......................... (17,600) -- (198) -- 198 --
Director Compensation
Plan............................... 3,103 -- 37 -- -- 37
Net income........................... -- -- -- 8,440 -- 8,440
---------- --- ------- ------- ----- -------
Balances, December 31, 1996.......... 4,922,503 $ 5 $13,919 $22,180 $(853) $35,251
========= === ======= ======= ===== =======
See notes to consolidated financial statements.
F-5
RIVIERA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
1994 1995 1996
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income.............................................................. $4,790 $6,344 $8,440
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................................ 5,674 6,811 8,212
Provision for bad debts.............................................. 991 478 524
Provision for gaming discounts....................................... 133 143 232
Other, net........................................................... -- -- (505)
Interest expense..................................................... 12,764 12,453 12,085
Interest paid........................................................ (13,052 (12,489) (12,072)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable......................... (1,116) 126 (1,535)
Decrease (increase) in inventories................................. (508) 86 (853)
Increase in prepaid expenses and other assets...................... (310) (212) (90)
Decrease in restricted cash for periodic slot payments............. 591 318 578
Increase in accounts payable....................................... 1,064 1,033 166
Increase in accrued expenses....................................... 2,393 758 104
Increase (decrease) in current income taxes payable................ 573 (522) 362
Increase in deferred income taxes payable.......................... 2,010 1,013 1,603
Increase in non-qualified pension plan obligation to CEO
upon retirement................................................. 375 400 1,039
------ ------ ------
Net cash provided by operating activities....................... 16,372 16,740 18,290
------ ------ ------
Cash flows from investing activities:
Capital expenditures for property and equipment......................... (8,933) (7,836) (14,923)
Decrease (increase) in other assets..................................... (1,506) (382) 1,906
------ ------ ------
Net cash used in investing activities........................... (10,439 (8,218) (13,017)
------ ------ ------
Cash flows from financing activities:
Proceeds from long-term borrowings...................................... 675 176 209
Payments on long-term borrowings........................................ (3,371) (3,159) (2,226)
Proceeds from issuance of stock to employees and directors.............. -- -- 197
Collections of notes receivable from employees.......................... -- -- 332
--
Net cash used in financing activities........................... (2,696) (2,983) (1,488)
------ ------ ------
Increase in cash and cash equivalents..................................... 3,237 5,539 3,785
Cash and cash equivalents, beginning of period............................ 13,186 16,423 21,962
------ ------ ------
Cash and cash equivalents, end of period.................................. $16,423 $21,962 $25,747
======= ======= =======
Supplemental disclosure of cash flow information -- Income
taxes paid.............................................................. $292 $2,852 $2,463
==== ====== ======
Supplemental disclosure of non-cash financing activities:
Stock issued to employees for notes receivable.......................... $1,383
======
Non-cash reductions of long-term debt................................... $845
====
See notes to consolidated financial statements.
F-6
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Riviera Holdings Corporation (the "Company") and its wholly-owned
subsidiary Riviera Operating Corporation ("ROC") were incorporated on January
27, 1993, in order to acquire all assets and liabilities of Riviera, Inc.
Casino-Hotel Division on June 30, 1993, pursuant to a plan of reorganization.
In July 1994, management established a new division, Riviera Gaming
Management, Inc. ("RGM") for the purpose of obtaining management contracts in
Nevada and other jurisdictions. In August 1995, RGM incorporated in the state of
Nevada as a wholly owned subsidiary of ROC.
Nature of Operations
The primary line of business of the Company is the operation of the Riviera
Hotel & Casino on the "Strip" in Las Vegas, Nevada. The Company is engaged in a
single industry segment, the operation of a hotel/casino with restaurants and
related facilities. The Company also manages the Four Queens Hotel/Casino in
downtown Las Vegas (see Note 9).
Casino operations are subject to extensive regulation in the State of
Nevada by the Gaming Control Board and various other state and local regulatory
agencies. Management believes that the Company's procedures for supervising
casino operations, for recording casino and other revenues and for granting
credit comply, in all material respects, with the applicable regulations.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries ROC and RGM. All material intercompany
accounts and transactions have been eliminated.
Cash and Cash Equivalents
All highly liquid investment securities with a maturity of three months or
less when acquired are considered to be cash equivalents. The Company accounts
for investment securities in accordance with Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), Accounting for Certain Investments in Debt and
Equity Securities.
The Company's investment securities, along with certain cash and cash
equivalents that are not deemed securities under SFAS 115, are carried on the
consolidated balance sheets in the cash and cash equivalents category. SFAS 115
addresses the accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities, and requires such securities to be classified as either
held-to-maturity, trading or available-for-sale. Management determines the
appropriate classification of its investment securities at the time of purchase
and reevaluates such determination at each balance sheet date. Pursuant to the
criteria that are prescribed by SFAS 115, the Company has classified its
investment securities in inventory as of December 31, 1994,
F-7
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
and acquired during fiscal 1995 as held to maturity. Held to maturity securities
are required to be carried at amortized cost. At December 31, 1996, securities
classified as held to maturity were comprised of debt securities issued by the
U.S. Treasury and other U.S. government corporations and agencies and repurchase
agreements with an amortized cost of $19,756,000 maturing in three months or
less.
Inventories
Inventories consist primarily of food, beverage, gift shop and promotional
inventories and are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Property and Equipment
Property and equipment are stated at the lower of cost or market, and
capitalized lease assets are stated at the lower of the present value of future
minimum lease payments at the date of lease inception or market value. Interest
incurred during construction of new facilities or major additions to facilities
is capitalized and amortized over the life of the asset. Depreciation is
computed by the straight-line method over the shorter of the estimated useful
lives or lease terms, if applicable, of the related assets, which range from 5
to 40 years. The costs of normal maintenance and repairs are charged to expense
as incurred. Gains or losses on disposals are recognized as incurred.
Restricted Cash for Periodic Slot Payments
At December 31, 1995 and 1996, the Company had interest-bearing deposits
with a commercial bank in the amount of $1,039,000 and $461,000 respectively,
which are restricted as to use. These amounts represent deposits required by the
State of Nevada Gaming Control Board to fund periodic slot payments due
customers through the year 2000.
Fair Value Disclosure as of December 31, 1996
Cash and cash equivalents, accounts receivable, restricted cash for
periodic slot payments, accounts payable and accrued expenses -- The carrying
value of these items are a reasonable estimate of their fair value.
Long-term Debt -- The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities. Based on the borrowing rates currently available to the Company for
debt with similar terms and average maturities, the estimated fair value of
long-term debt is approximately $112,588,000.
Casino Revenue
The Company recognizes, as gross revenue, the net win from gaming
activities, which is the difference between gaming wins and losses.
F-8
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Promotional Allowances
Promotional allowances consist primarily of accommodations, entertainment,
and food and beverage services furnished without charge to customers. The retail
value of such services is included in the respective revenue classifications and
is then deducted as promotional allowances.
The estimated costs of providing promotional allowances are classified as
costs of the casino operating department through interdepartmental allocations.
These allocations for the years ended December 31, 1994, 1995 and 1996 are as
follows:
1994 1995 1996
-------- -------- ------
(in thousands)
Food and beverage.............................. $7,225 $6,570 $6,671
Rooms.......................................... 1,843 1,451 1,410
Entertainment.................................. 2,121 2,280 2,592
------- ------- -------
Total costs allocated to casino........... $11,189 $10,301 $10,673
======= ======= =======
Federal Income Taxes
The Company and its subsidiaries file a consolidated federal tax return.
The Company accounts for income taxes in accordance with SFAS 109, Accounting
for Income Taxes. SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred income taxes
reflect the net tax effects of (i) temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, and (ii) operating loss and tax credit
carryforwards.
Net Income Per Share
Earnings per common and common equivalent share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock. Fully diluted
per share amounts are substantially the same as primary per share amounts for
the periods presented.
On November 16, 1995, the shareholders of the Company approved an amendment
to the Company's Amended and Restated Articles of Incorporation to increase the
authorized shares of common stock from 5,000,000 to 20,000,000 and a four for
one stock split. Accordingly, per share information, average number of shares
outstanding and number of shares outstanding in the accompanying consolidated
financial statements have been adjusted for the stock split as of the earliest
date presented (December 31, 1994).
F-9
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from estimates.
Reclassifications
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform with the current year presentation.
Recently Adopted Accounting Standards
During 1996 the Company adopted the provisions of Statement No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of SFAS 121 had no impact on the financial position or
results of operations of the Company.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, which
establishes financial accounting and reporting standards for stock-based
employee compensation plans and for transactions in which an entity issues its
equity instruments to acquire goods or services from nonemployees. The Company
continues to account for stock-based compensation arrangements in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and therefore the adoption of SFAS 123 had no effect on the financial
position or results of operations of the Company. The Company has included
additional disclosures about stock-based employee compensation plans as required
by SFAS 123 (see Note 11).
F-10
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Accounts Receivable
Accounts receivable consist of the following at December 31:
1995 1996
---- ----
(in thousands)
Casino............................................... $2,581 $2,280
Hotel................................................ 2,494 3,479
------ ------
Total.............................................. 5,075 5,759
Less allowance for bad debts and discounts........... 741 646
------ ------
Total.............................................. $4,334 $5,113
====== =======
Changes in the casino and hotel allowance for bad debts and discounts for
the years ended December 31, 1995 and 1996 consist of the following:
1995 1996
---- ----
(in thousands)
Beginning balance.......................................... $1,424 $741
Write-offs................................................. (1,358) (912)
Recoveries................................................. 54 61
Provision for bad debts.................................... 478 524
Provision for gaming discounts............................. 143 232
------ -------
Ending balance........................................... $ 741 $ 646
====== ========
3. Property and Equipment
Property and equipment consists of the following at December 31:
1995 1996
---- ----
(in thousands)
Land and improvements..................................... $21,751 $21,751
Buildings and improvements................................ 75,875 77,455
Equipment, furniture, and fixtures........................ 38,307 51,650
------
Total property and equipment......................... 135,933 150,856
Less accumulated depreciation............................. 14,884 23,096
------ -------
Net property and equipment........................... $121,049 $127,760
======== ========
F-11
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Accounts Payable and Accrued Expenses
Accounts payable consist of the following at December 31:
1995 1996
---- ----
(in thousands)
Outstanding chip and token liability................. $854 $836
Casino account deposits.............................. 642 498
Unpaid race and sports book winners.................. 26 17
Miscellaneous gaming................................. 850 762
------ ------
Total liabilities related to gaming activities.. 2,372 2,113
Accounts payable to vendors.......................... 4,497 5,118
Hotel deposits....................................... 1,415 1,123
Other................................................ 80 176
------ ------
Total........................................... $8,364 $8,530
====== ======
Accrued expenses consist of the following at December 31:
1995 1996
---- ----
(in thousands)
Payroll, related payroll taxes and vacation........... $5,095 $5,244
Health and other liability claims..................... 548 450
Union benefits and dues............................... 816 663
Progressive slot machine liability.................... 226 203
Taxes................................................. 518 631
Professional fees..................................... 208 176
Incentive and pension plans........................... 2,209 2,357
Interest.............................................. 20 33
------- ------
Total............................................ $9,640 $9,757
====== ======
F-12
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Long-Term Debt
Long-term debt consists of the following at December 31:
1995 1996
---- ----
(in thousands)
First Mortgage Notes maturing on December 31, 2002, bearing interest at the rate
of 11% per annum, payable semi-annually on June 30 and December 31, redeemable
beginning June 1, 1998, at 104.3125%; 1999 at 102.8750%; 2000 at 101.4375%;
and 2001 and thereafter at 100%. These notes are collateralized by the
physical structures comprising the Riviera Hotel and Casino....................... $100,000 $100,000
Unsecured, non-interest bearing notes to settle Class 4, 5 and 12
claims, discounted at 16.8%, paid in 1996......................................... 2,056 --
Unsecured, non-interest bearing promissory note in an original principal amount
of $8,000,000 (the "Class 13/14 Note") to settle the claims of the former sole
shareholder, and his affiliates, payable to a bank in semi-annual installments
of $500,000 to
$750,000 discounted at 12%........................................................ 4,159 4,707
Capitalized lease obligations (see Note 7).......................................... 1,341 986
Unsecured promissory notes in the original principal amount of $441,262, bearing
interest at the rate of 8.5% per annum, payable
monthly and maturing on December 31, 1998......................................... 266 185
Periodic slot payments due customers through 2000, prefunded by
restricted cash (see Note 1)...................................................... 1,039 461
Non-qualified pension plan obligation to the CEO of the Company, payable in 20
quarterly installments upon expiration of his
employment contract............................................................... 1,710 2,749
-------- --------
Total long-term debt........................................................... 110,571 109,088
Less current maturities by terms of debt............................................ 2,322 1,550
-------- --------
Total.......................................................................... $108,249 $107,538
======== ========
Maturities of long-term debt for the years ending December 31, were as
follows:
(in thousands)
1997........................................................ $1,550
1998........................................................ 1,884
1999........................................................ 1,817
2000........................................................ 2,043
2001........................................................ 1,244
Thereafter.................................................. 100,550
--------
Total.................................................. $109,088
========
The Indenture for the First Mortgage Notes imposes certain financial
covenants and restrictions on the Company, including but not limited to the
maintenance of a minimum consolidated net worth, which should not be less than
$2,542,000 for any two consecutive fiscal quarters, and limitations on (i)
dividends on common stock, (ii) liquidation of assets, (iii) incurrence of
indebtedness, (iv) creation of subsidiaries and joint ventures and (v) capital
purchases. Capital purchases are limited to annual cash expenditures of
$6,000,000 plus 80% of cumulative available cash flow from the Company's
inception
F-13
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
at July 1, 1993, to the extent that this cash flow has not been utilized in any
prior year. Management believes the Company is in compliance with the covenants
of the Indenture.
Effective September 8, 1995, the Board of Directors and holders of 94% of
the Company's First Mortgage Notes approved amendments to certain note
restrictive covenants. Noteholders who consented to the modification of the
restrictive covenants were paid a fee of $5.00 for each $1,000 of Notes held,
for an aggregate payment by the Company of $500,000 which is included in other
assets at December 31, 1995 and 1996 and amortized over the life of the related
debt. These costs are being amortized using the straight-line method which
approximates the effective interest method over the life of the indebtedness.
The amendments to the restrictive covenants were designed to permit the
Company's management team to utilize its expertise in turning around troubled
gaming properties which are either in or on the verge of bankruptcy and to
manage casinos in so called "new venues".
During the fourth quarter of 1996, the Company made the final payment on the
note issued to settle the Class 12 claim, which was less than what was recorded
and resulted in income of approximately $845,000. Also during the fourth quarter
of 1996, the terms of the Class 13/14 Note was revised, which resulted in a
decrease in the discount rate from 16.8% to 12.0% and increased principal,
resulting in additional expense of $340,000. Other, net income for the year
ended December 31, 1996 includes the net effect of the above transactions.
In February, 1997, the Company entered into a $15.0 million five year
reducing revolving line of credit collateralized by equipment. The revolving
line of credit bears interest at prime plus 0.5% or LIBOR plus 2.9%. The Company
has not utilized this line of credit.
The Company has credit facilities totaling $1,100,000 at banks for letters
of credit issued periodically to foreign vendors for purchases of merchandise.
6. Federal Income Taxes
SFAS 109 requires the Company to compute deferred income taxes based upon
the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
The effective income tax rates on income attributable to continuing
operations differ from the statutory federal income tax rates for the year ended
December 31, 1994, 1995 and 1996 as follows:
1994 1995 1996
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(dollars in thousands)
Taxes at federal statutory rate............ $2,680 35.0% $3,386 35.0% $4,504 35.0%
Other 195 2.5 (54) (1.0) (76) (1.0)
------ ---- ----- ---- ----- ----
Provision for income taxes............... $2,875 37.5% $3,332 34.0% $4,428 34.0%
====== ==== ====== ==== ====== ====
F-14
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The tax effects of the items comprising the Company's net deferred tax
liability consist of the following at December 31:
1995 1996
---- ----
(in thousands)
Deferred Tax Liabilities:
Basis in long-term debt obligations....................................... $640 $457
Reserve differential for hospitality and gaming activities................ 1,090 1,133
Difference between book and tax depreciable property...................... 4,430 5,226
Other..................................................................... 383 806
------ -----
Total.................................................................. 6,543 7,622
------ -----
Deferred Tax Assets:
Reserves not currently deductible......................................... 1,500 1,806
Bad debt reserves......................................................... 260 226
AMT credit................................................................ 1,760 964
------ ------
Total.................................................................. 3,520 2,996
------ ------
Net deferred tax liability........................................... $3,023 $4,626
====== ======
The Company has $964,000 of alternative minimum tax credit available to
offset future income tax liabilities. The credit has no expiration date.
7. Leasing Activities
The Company leases certain equipment under capital leases. These agreements
have been capitalized at the present value of the future minimum lease payments
at lease inception and are included with property and equipment. Management
estimates the fair market value of the property and equipment subject to the
leases approximates the net present value of the leases. The leased property and
equipment consist primarily of signs and air conditioning equipment.
The following is a schedule by year of the minimum rental payments due under
capital leases, as of December 31, 1996:
(in thousands)
1997........................................................ $ 441
1998........................................................ 441
1999........................................................ 429
2000........................................................ 227
------
Total minimum lease payments.............................. 1,538
Less taxes, maintenance and insurance....................... 390
Less interest portion of payments........................... 162
------
Present value of net minimum lease payments............... $ 986
======
Rental expense for the years ended December 31, 1994, 1995 and 1996 was
approximately $295,000, $406,000 and $334,000, respectively.
In addition, the Company leases retail space to third parties under terms of
noncancelable operating leases which expire in various years through 1999.
Rental income, which is included in other income,
F-15
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
for the years ended December 31, 1994, 1995 and 1996 was approximately
$1,687,000, $1,533,000 and $1,573,000, respectively.
At December 31, 1996, the Company had future minimum annual rental income
due under noncancelable operating leases as follows:
(in thousands)
1997................................................. $1,159
1998................................................. 946
1999................................................. 748
2000................................................. 494
2001................................................. 351
Thereafter........................................... 993
------
Total........................................... $4,691
======
8. Commitments and Contingencies
The Company is party to several routine lawsuits both as plaintiff and
defendant arising from normal operations of a hotel. Management does not believe
that the outcome of such litigation in the aggregate will have a material
adverse effect on the financial position or results of operations of the
Company.
9. Management Agreements
Since August 1996, RGM has been operating the Four Queens located adjacent
to the Golden Nugget on Fremont Street in downtown Las Vegas under an interim
management agreement for a fee of $83,333 per month. A long-term management
agreement (the "Management Agreement") with Elsinore Corporation ("Elsinore"),
the owner of the Four Queens, went into effect on February 28, 1997, the
effective date of the Chapter 11 plan of reorganization of Elsinore.
The term of the Management Agreement is approximately 40 months, subject to
earlier termination or extension. Either party may terminate the Management
Agreement if cumulative earnings before interest, taxes, depreciation and
amortization ("EBITDA") for the first two fiscal years is less than $12.8
million. The term of the Management Agreement can be extended by an additional
24 months at RGM's option, if cumulative EBITDA for the three fiscal years of
the term is at least $19.2 million. RGM will be paid a fee of 25% of any
increase in annual EBITDA over $4.0 million, subject to a $1.0 million minimum
fee, payable in equal monthly installments. RGM has received warrants for 20% of
Elsinore's fully diluted equity, exercisable during the term or extended term of
the Management Agreement at an exercise price based on the higher of (i) the per
share book value on the effective date of the Elsinore bankruptcy plan or (ii)
total shareholders' equity of $5.0 million. Either party can terminate the
Management Agreement if (i) substantially all the Four Queens' assets are sold,
(ii) the Four Queens is merged or (iii) a majority of the Four Queens' or
Elsinore's shares are sold. Upon such termination RGM will receive a $2.0
million termination bonus minus any amount realized or realizable upon exercise
of the warrants.
F-16
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Employment Agreements and Employee Benefit Plans
The Company has an employment agreement with Mr. Westerman, Chairman of the
Board and Chief Executive Officer of the Company. This agreement includes an
annual base salary, an incentive bonus based upon the extent of adjusted
operating earnings, contributions to a Non-Qualified Pension Plan and
contributions to a Profit Sharing and 401(k) Plan. In addition, the Company has
termination fee agreements with each of the Directors, Executive Officers and
Significant Employees pursuant to which each of such employees will be entitled
to receive one year's salary and health insurance benefits if their employment
with the Company is terminated within one year of a change of control of the
Company and without cause, or the involuntary termination of Mr. Westerman. On
November 21, 1996, the Company amended Mr. Westerman's employment agreement
subject to stockholder approval at their annual meeting scheduled for May 8,
1997. If the Company's stockholders do not ratify the amended agreement the
agreement described above will remain in full force.
The Company has an incentive compensation plan, covering employees of the
Company who, in the opinion of the Chairman of the Board, either serve in key
executive, administrative, professional or technical capacities with the Company
or other employees who also have made a significant contribution to the
successful and profitable operation of the Company. The amount of the bonus is
based on operating earnings before depreciation, amortization, interest expense,
provision for income taxes, extraordinary losses and gains, any provisions or
payments made pursuant to the Plan, and any provisions or payments made pursuant
to the incentive compensation of the Chairman and Chief Executive Officer. At
December 31, 1994, 1995 and 1996 the Company recorded accrued bonuses of
$1,430,000 and $2,123,000 and $2,588,000, respectively, based upon the above
incentive compensation plan and the incentive compensation plan established for
the Chairman of the Board under his employment agreement.
The Company contributes to multi-employer pension plans under various union
agreements to which the Company is a party. Contributions, based on wages paid
to covered employees, were approximately $1,725,000, $1,576,000 and $1,650,000
for the years ended December 31, 1994, 1995 and 1996. These contributions were
for approximately 1,364 employees including food and beverage employees, room
department employees, carpenters, engineers, stage hands, electricians, painters
and teamsters. The Company's share of any unfunded liability related to
multi-employer plans, if any, is not determinable.
The Company sponsors a Profit Sharing and 401(k) Plan which incurred
administrative expenses of approximately $67,000, $59,000 and $34,000 for the
years ended 1994, 1995 and 1996.
The profit sharing component of the Profit Sharing and 401(k) Plan provides
that the Company will make a contribution equal to 1% of each eligible
employee's annual compensation if a prescribed annual operating earnings target
is attained and an additional 1/10th of 1% thereof for each $200,000 by which
operating earnings is exceeded, up to a maximum of 3% thereof. The Company may
elect not to contribute to the Profit Sharing and 401(k) Plan if it notifies its
employees in January of the Profit Sharing and 401(k) Plan year. An employee
will become vested in the Company's contributions based on the employee's years
of service. An employee will receive a year of vesting service for each plan
year in which the employee completed 1,000 hours of service. Vesting credit will
be allocated in 20% increments for each year of service commencing with the
attainment of two years of service. An employee will be fully vested following
the completion of six years of service.
The 401(k) component of the Profit Sharing and 401(k) Plan provides that
each eligible employee may contribute up to 15% of such employee's annual
compensation, and that the Company will contribute 1%
F-17
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
of each employee's annual compensation for each 4% of compensation contributed
by the employee, up to a maximum of 2%. All non-union employees of the Company
will be eligible to participate in the Profit Sharing and 401(k) Plan after
twelve consecutive months of service with the Company.
ROC is a party to termination fee agreements with certain significant
employees pursuant to which each such employee is entitled to receive one year's
salary and benefits if his or her employment with ROC is terminated within one
year of a change of control of the Company or ROC, or the involuntary
termination of Mr. Westerman's employment. The estimated total amount that would
be payable under all such agreements is approximately $1.3 million in salaries
and $400,000 in benefits.
ROC is a party to stay bonus agreements with certain significant employees
pursuant to which each such employee is entitled to receive one year's salary
(less the amount of any incentive bonus paid in 1997 for 1996) in the event
there is a change of control of the Company. The agreements expire on December
31, 1997. The estimated total amount that would be payable under all such
agreements is approximately $300,000.
11. Stock Option Plans
At a meeting held on July 27, 1993, the Company's Board of Directors adopted
a stock option plan (the "Stock Option Plan") providing for the issuance of both
non-qualified and incentive stock options (as defined in the Internal Revenue
Code). This stock option plan was ratified by the Company's shareholders at the
April 26, 1994 annual meeting. The number of shares available for purchase under
the Stock Option Plan as adopted was 120,000 (as adjusted pursuant to
antidilution provisions). On November 16, 1995, the stockholders approved a
four-for-one stock split, increasing the number of shares of Common Stock
available for purchase under the Stock Option Plan to 480,000. Options were
granted for 228,000 shares for 1993, 132,000 shares for 1994, none for 1995, and
110,000 for 1996, leaving a balance available for future grants of 10,000
shares. No options were exercised or cancelled in 1994, 1995 or 1996. On
November 21, 1996 the Company amended the Stock Option Plan to increase the
number of shares available under the Stock Option Plan from 480,000 shares to
1,000,000 shares and granted options to purchase 300,000 additional shares to
Mr. Westerman, each subject to stockholder approval at the annual meeting of
stockholders scheduled in May 1997. Options vest 25% one year after the date of
grant and 25% each subsequent year. The term of an option can in no event be
exercisable more than ten years (five years in the case of an incentive option
granted to a shareholder owning more than 10% of the Common Stock), or such
shorter period, if any, as may be necessary to comply with the requirements of
state securities laws, from the date such option is granted.
On March 5, 1996, the Board of Directors adopted an employee stock purchase
plan (the "Stock Purchase Plan"), which was approved by the stockholders on May
10, 1996. A total of 300,000 shares of common stock (subject to adjustment for
capital changes) in the aggregate may be granted under the Stock Purchase Plan.
The Stock Purchase Plan is administered by the compensation committee. On May
31, 1996, approximately 560 union and non-union employees participated in the
1996 employee stock purchase plan. Under the plan, 137,000 shares were issued at
a discount to employees at $11.26 for $160,000 cash and the balance in notes
receivable of $1,383,000 which are payable over two years via payroll deduction.
During 1996, 17,600 shares were returned to the plan as the result of refunds to
the employees.
On May 10, 1996, the shareholders approved a Nonqualified Stock Option Plan
for Non-Employee Directors (the "Nonqualified Stock Option Plan") and a Stock
Compensation Plan for Directors serving
F-18
RIVIERA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
on the Compensation Committee (the "Stock Compensation Plan"). The total number
of shares available for purchase under each plan is 50,000. Pursuant to the
Nonqualified Stock Option Plan, two directors were granted options to purchase
an aggregate of 4,000 shares in 1996 at an exercise price of $13.25. As of
December 31, 1996, 3,103 shares were issued pursuant to the Stock Compensation
Plan.
The Company has adopted the disclosures-only provision of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized for the Stock Option Plan.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. Had compensation cost for the Stock Option
Plan been determined based on the fair value at the date of grant for awards
consistent with the provisions of SFAS 123, the Company's net income and pro
forma net income common share and common share equivalent would have been
decreased to the pro forma amounts indicated below:
Years Ended December 31,
------------------------
1995 1996
----- ----
(in thousands, except
per share data)
Net income-as reported............................ $6,344 $8,440
Net income-pro forma.............................. 6,289 8,380
Net income per common and common
share equivalent-as reported.................... $1.26 $1.63
Net income per common and common share
equivalent-pro forma............................ $1.25 $1.61
12. Subsequent Event (unaudited)
On March 4, 1997, the Company entered into a letter of intent with Eagle
Gaming, L.P. ("Eagle") to form a joint venture, Riviera Black Hawk, LLC ("RBL"),
to develop a casino (the "Project") in the Black Hawk/Central City, Colorado
gaming market for approximately $55 million, subject to satisfaction of a number
of conditions. The Company will manage the Project for a management fee based
upon the gross revenue and EBITDA of the Project. The Company will initially
have an approximately 80% equity interest and Eagle an approximately 20% equity
interest in the joint venture. Eagle has the option, prior to the Company being
licensed by the Colorado gaming authorities, to acquire up to 29.9% of
additional equity interest in the Project from the Company at the Company's
cost. If Project costs exceed the approximately $55 million preliminary
estimate, the Company and Eagle will be required to bear their respective
pro-rata share of increased costs or their respective equity interests will be
adjusted. In addition, the Company has committed to provide a completion
guaranty for up to $5.0 million.
F-19